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Analyst: Live Product Boosts Value of Hulu

Web streaming service Hulu’s expansion into live streaming increases its value dramatically, enough to boost the stock of 21st Century Fox, one of its owners, according to a new report from analyst Omar Shiekh of Credit Suisse.

Shiekh says he values Hulu at $25 billion, up from $15 billion. Hulu’s owners—Fox, The Walt Disney Co. and Comcast—have been investing in Hulu, which has been producing original content and now plans to become a virtual MVPD, offering live channels including sports and news.

Hulu had been strictly a streaming VOD service, like Netflix, but live streaming could be a transformational product, Shiekh said in a report Monday.

“We expect Hulu to launch a new service which provides access to 50+ live broadcast and cable networks plus a deep on-demand library and full in-season catch-up for $40 per month. We believe the product will have wide commercial appeal (the convenience of Netflix plus live) and attractive economics ($12 per sub/month in EBIT contribution). After $1.4 billion of cumulative losses since 2008, we think it can help Hulu turn EBIT positive in 2018 and generate $2.2 billion by 2020,” Shiekh said.

Sheikh expects the new Hulu product to attract between10 million and 20 million subscribers. “We regard that as conservative. We also highlight that a "Blue Sky" scenario in which Hulu live streaming gets to 20m subscribers would boost the platform's 2020 EBIT to over $3 billion and its valuation to $35 billion.

Because of the potential growth of Hulu,  Credit Suisse has put 21st Century Fox on its U.S. and Global Focus Lists for investors, replacing Time Warner among media stocks.

In this short term for Fox, “we trim 2016/17 earnings per share by 3%/1% to $1.74/$2.25, but continue to expect close to 30% year-over-year EPS growth in '17,” Sheikh said.

“Stripping out the stakes in Sky (39%), STAR India (100%), Hulu (33%) and Shine Endemol (50%), at a combined $27 billion valuation, "core" Fox is trading at just 5.5x 2017 estimates EV/EBITDA, far too cheap vs peers on 8.7x.” said Sheik, who sees 40% upside on Fox shares and a target price of $40.