Google Stock: YouTube makes the competition work (GOOG)
Google (NASDAQ:GOOG) (NASDAQ: GOOGL) acquired YouTube for just $1.65 billion in October 2006 and it turned out to be an incredible investment. Of course, it would have been even more impressive if they would have done it with cash instead of shares. In a perfect world, they would have used some of the $3.5 billion in cash and $7.7 billion in marketable securities from 2006 balance sheet but that’s splitting hairs.
My thesis is that YouTube forces competitors to work extremely hard.
Young online users
An article from the August Pew Research Center shows that 95% of American teenagers use YouTube compared to 67% for TikTok, 62% for Instagram (META), 59% for Snapchat (SNAP) and 32% for Facebook:
The same article shows that 60% of American teenagers are on YouTube at least several times a day:
An August post on HubSpot (HUBS) shows that YouTube is used as a product discovery tool by 56% of Gen Z, 54% of Gen Y, 48% of Gen X and 26% of Baby Boomers.
YouTube naturally attracts young viewers, but other online platforms have to make big investments to attract young audiences. Facebook got more access to teens in 2012 when they acquired Instagram for $1 billion, but now Instagram’s user base is aging and Meta needs to work hard to find ways to reach younger users. organically rather than relying on acquisitions.
For decades, the TV advertising market was unassailable, but the internet has changed that. Broadcasting has been losing young viewers for years. Citing a British example, TBI said what follows:
92% of 12-15 year olds watched content, ranging from streamers like BBC iPlayer to platforms such as YouTube, while only 61% engaged with TV broadcasting.
It’s not just young viewers who are losing television; declines occur for all age groups. Nielsen shows that streaming accounted for 34.8% of US TV viewing in July, which was higher than the 34.4% we saw from cable and 21.6% from broadcast. YouTube has grown from 6.2% of TV viewing time in July 2021 to 7.3% in July 2022 as streaming continues to replace cable and broadcast.
Linear television companies are constantly striving to win back viewers who have left for YouTube. On the 1Q21 call, senior vice president and chief commercial officer Philipp Schindler noted that more 18 to 49 year olds watch YouTube than all of linear TV combined. Vice President Schindler cited additional statistics for linear TV in the 2Q21 call, saying that 70% of YouTube’s reach is to audiences not reachable by traditional TV media.
Vice President Schindler noted the distinction between YouTube and other streaming services in the 1Q22 call:
According to Nielsen, in the United States, YouTube accounts for more than 50% of ad-supported streaming viewing time on connected TVs among people aged 18 and older. And over 35% of viewers in this group cannot be reached by any other ad-supported streaming service. In other words, we find that when people choose to watch ad-supported CTV, they choose to watch YouTube, and YouTube delivers CTV audiences that advertisers can reach anywhere else.
All companies in the TV industry have to work hard to compete with YouTube. Traditional TV companies have to try to bring back audiences while streaming companies have to invest heavily in content. Netflix needs to change its business model to include advertising, and streamers that already have advertising need to make their systems more efficient. The experience that Google brings to YouTube through its search advertising business combined with its investments in AI makes it a fierce competitor in the advertising space.
Spotify (SPOT) has to work extremely hard to compete with YouTube in the podcasting space. August Insider article talks about how YouTube has become the biggest podcasting ecosystem without showcasing the kind of work seen by Apple (AAPL) and Spotify. Quoting the NY Times, the BI article notes that Spotify had to shell out over $200 million to get 3 years of exclusivity with Joe Rogan:
The details of YouTube’s role in the podcast deal, which have not previously been reported, illustrate a surprising development in the world of podcasting over the past few years: YouTube has become a juggernaut. Two recent surveys, one by Cumulus Media and the other by Voices, showed that YouTube was the most frequently used podcasting platform, beating out Spotify and Apple’s podcasting apps. Even more surprisingly, the video service did next to nothing to make this happen.
The article goes on to talk about YouTube’s recommendation capabilities:
But unlike TV, YouTube has a recommendation algorithm that can direct new listeners to shows, solving a problem for podcasters who struggle to get discovered by new audiences.
Latasha James hosts “The Freelance Friday Podcast” and she was quoted as saying that she gets leads for her business from YouTube videos that are 5 years old.
YouTube’s advertising revenue increased by 30.5%, from $15,149 million in 2019 to $19,772 million in 2020, and then by 45.9% to $28,845 million in 2021! Things have slowed so far in 2022, as 1H22 YouTube ad revenue of $14,209 million was only up 9.2% from 1H21’s $13,007 million. YouTube also generates subscription revenue which is integrated into the “Google other” segment. Variety reports that YouTube CEO Susan Wojcicki wrote a letter to staff regarding the departure of YouTube Chief Commercial Officer Robert Kyncl in early 2023. The letter explains that YouTube has paid out over $30 billion to creators, artists and media companies over the past 3 years.
If YouTube were a standalone company, it would be valued in the triple digits of billions, but that’s only a small part of Google’s overall valuation. My thoughts on the overall rating haven’t changed much since my August 4 post. I still think the core segments, including YouTube, have a valuation range of $1.825 billion to $2.010 billion. This does not include Google Cloud and other bets. Share prices for September 8 are $108.38 for GOOGL and $109.42 for GOOG. To get the market cap of $1,420 billion, we multiply these stock prices by 6,881 million and 6,163 million which are account A/B and C respectively. The value of the company is almost $100 billion lower. to market capitalization due to $125 billion in cash and securities that are only partially offset by considerations such as debt and lease liabilities.
Market cap and enterprise value are below my valuation range, and I think GOOG stock is undervalued.