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Yahoo! Inc. (YHOO), Google Inc (GOOG): Will This Help Or Hurt?

Rumors are starting to surface that Yahoo! Inc. (NASDAQ:YHOO) will be acquiring Hulu. Yahoo! needs to make a successful entrance into the video streaming market with Hulu being its best bet at competing with either YouTube or Netflix, Inc. (NASDAQ:NFLX). This should give shareholders added reason to stay the course with the company.

Hulu’s valuation estimate

According to Washington Post, Hulu’s revenue last year jumped more than 65% to $695 million, driven by advertising and subscriptions, the company said on its blog. The service has more than 4 million paying subscribers and served commercials from more than 1,000 advertisers in 2012, a 28% increase from a year earlier.

The industry average price to sales ratio for internet content and information companies is 4.06 (I averaged every price to sales ratio in the internet content and information industry).

Assuming the sales figures of $695 million are accurate, the stock would have to be bought at 4.06 times that value which implies that the company is worth $2.8 billion based on my fair value estimate. Again, I could only use the Price to Sales ratio as that is the only quantitative data on the company’s operations I have available to me.

Yahoo! Inc. (YHOO)Yahoo! Inc. (NASDAQ:YHOO) has a lot of capital on its balance sheet. In fact, Yahoo! has around $4.1 billion in cash and short-term investments. The company’s large cash pile means it can afford a potential buyout of Hulu.

Netflix and YouTube combatants in the space

Yahoo!’s best bet at competing with Netflix and Google Inc (NASDAQ:GOOG)‘s  YouTube is through the Hulu and Hulu Plus. Hulu already has an established user base of 4 million paying subscribers when compared to Netflix, Inc. (NASDAQ:NFLX) at 27 million subscribers. Even if Yahoo! Inc. (NASDAQ:YHOO) was to purchase Hulu at $2.8 billion, it would have to buy content so that Hulu could catch up to Netflix. The problem with competing with Netflix is that Netflix has exclusive rights to movie content from The Walt Disney Company (NYSE:DIS) and Warner Bros. for perpetuity after three years. Perhaps, it is already game-over for Yahoo! in the movie streaming space, but it can at least focus on the television series aspect of Hulu Plus.

Yahoo! Inc. (NASDAQ:YHOO) is far behind in video streaming services; Yahoo! reported a 6% decline in display-based ads versus Google Inc (NASDAQ:GOOG)’s 12% growth rate. Google’s YouTube platform is pulling ahead of Yahoo! Screen. One of the reasons why Google is pulling ahead of Yahoo! in display advertising is because Google’s YouTube platform is very strong. This can be further emphasized with Quantcast evaluating YouTube.com as the second most popular website in the United States. Yahoo! has missed the mark in the crowded video space.

Between competing with Google Inc (NASDAQ:GOOG) or Netflix, Inc. (NASDAQ:NFLX), Yahoo! Inc. (NASDAQ:YHOO) will most likely pour resources into competing with Netflix.

Conclusion

The current CEO of Yahoo! has been going on a string of acquisitions. Yahoo!’s biggest problem right now is that it is “good-enough” at everything, but it’s not the “best” at something. Right now, Yahoo! needs to figure out a way to become a leader in a certain industry and secure market dominance. In fact, I would make that Yahoo! Inc. (NASDAQ:YHOO)’s primary goal by 2020, “to become the best at something.”

The article Will This Potential Acquisition Help This Company Become Competitive? originally appeared on Fool.com and is written by Alexander Cho.

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