Analysts think of Alphabet (NASDAQ:GOOGL,NASDAQ:GOOG) stock in terms of the company’s Google search engine.
But its biggest growth engine is YouTube, its video service.
In its most recent quarterly report, released Oct. 29, Alphabet reported $5 billion in ad revenue for YouTube, up 31% from a year earlier.
But that’s not everything.
Its “Google, other” category includes subscription revenue for ads-free versions, and a “skinny bundle” cable service called YouTube premium. That revenue is bundled with hardware revenue, its Pixel Phone and Google Home speakers. That totals another $5.5 billion, up 37% from a year ago.
YouTube is now nearly 20% of Google’s business, and it’s growing three times faster than the rest of the company.
YouTube Trouble
In theory, YouTube is easy money. The traffic is plugged into Google’s network of cloud data centers, of which there are 24, on every continent except Africa. (Africa is still served by a partner network.) Most YouTube revenue comes from the ad network created for the search engine.
But it’s not that easy. YouTube is under continuous pressure over what it allows on and what it takes down. Efforts to curb misinformation are attacked from both the left and the right.
YouTube genres like “with me” videos, are big businesses in their own right. YouTube creators represent a huge labor force. New YouTube features are big news and represent potential anti-trust trouble. YouTube’s headquarters in San Bruno, California has over 1,000 employees.
Google bought YouTube in 2006 for $1.65 billion, when it was little more than a start-up. If founders Chad Hurley and Steve Chen had kept that stock, it would now be worth about $10.5 billion.
Despite this, YouTube is the biggest bargain in the history of media.
Beyond Ads
Given the government’s antitrust suit against it, focused on search and advertising, Google has a great incentive to get paid in other ways for YouTube.
In addition to testing shopping inside YouTube videos, Google is trying to build subscription revenue. The easy way is to get cash for turning off the ads. YouTube has 20 million “premium” members, as well as YouTube Music subscribers. At $12 per month the premium members would be worth nearly $3 billion a year.
Even bigger bucks could come from YouTube Premium, a $65 per month bundle of cable channels with 2 million users at the end of September. That’s about $1.6 billion. (Full disclosure: we cut our $150-per-month cable service last month and switched to YouTube Premium.) Over 6.5 million people cut cable service in the last year. That’s a big potential market, and a growing one.
Here, too, decisions on what to include in the bundle make a big difference to other companies. Sinclair Broadcast Group (NASDAQ:SBGI) absorbed a $4.2 billion loss in the last quarter after YouTube Premium and Walt Disney’s (NYSE:DIS) Hulu dropped their regional sports channels, most of which are branded as Fox Sports.
The Bottom Line on GOOG Stock
If you are buying GOOG stock for growth, you’re buying YouTube.
YouTube is the dominant player in free video. Millions of millennials get all their TV through YouTube. Most don’t pay for ads or YouTube Premium.
With new formats, and new ways to earn money like shopping, YouTube has both a near-monopoly in its space and a long “runway” of growth ahead of it.
Even splitting Google’s network of cloud data centers and ad network from YouTube might not impact it. The service could simply rent these services.
YouTube may be the biggest threat cable faces because it’s free. GOOG stock is currently valued at nearly 7 times sales. With YouTube generating nearly $6 billion per quarter of revenue, and growing faster than the main service, it’s probably worth $200 billion. Maybe more.
On the date of publication, Dana Blankenhorn did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at [email protected] or follow him on Twitter at @danablankenhorn.