Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

How Much Is YouTube Worth to Alphabet?

By Adam Levy - Updated Apr 12, 2019 at 9:48AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

And would it be worth more if Google spun it out?

YouTube is one of the fastest-growing parts of Google, the biggest business under the massive Alphabet ( GOOG 1.52% ) ( GOOGL 1.36% ) umbrella. The secular trend in digital video advertising has pushed YouTube toward the top in the company's quarterly list of revenue drivers.

But Alphabet still doesn't split out YouTube revenue despite its growing importance; it's lumped in with Google properties revenue in the company's earnings reports. Analysts estimate the company brought in $14 billion to $15 billion in net revenue last year, which is over 10% of Alphabet's total revenue. But considering its growth and position in the digital video ad market, YouTube could be worth a much higher percentage of Alphabet's market value.

A young woman and two young men on a balcony watching a video on a smartphone

Image source: Getty Images.

Finding a comparable

Needham's Laura Martin suggests YouTube's closest comparable is Netflix ( NFLX -0.21% ). Indeed, both companies are at the forefront of digital video, and both are showing substantial revenue growth.

YouTube's audience is more heavily weighted toward international viewers, as it has 1.8 billion monthly active users watching videos. Even if everyone in the U.S. watches YouTube, there'd still be bout 1.5 billion international users. By comparison, Netflix has about 139 million paid subscribers -- 81 million international, 58 million domestic. That's an indication that Netflix may have greater revenue growth potential as it's able to increase penetration in international markets.

That said, there's not much publicly available data on global video platforms. Amazon Prime Video is offered globally, but Amazon is extremely tight-lipped about all of its financial metrics. Other prominent video platforms are either restricted geographically, or otherwise don't report financials publicly.

Needham points out Netflix's enterprise value-to-revenue ratio of 10 would give YouTube a value of $140 billion by her estimate. That's about one-fifth of Alphabet's enterprise value. It also represents an 85x return on the $1.65 billion price Google paid for the video streaming service in 2006.

Check out the latest earnings call transcript for Alphabet.

The case that YouTube is worth even more inside Alphabet

Martin also suggests that Alphabet could create shareholder value by spinning off assets like YouTube or the company's cloud computing business. She suggests it would enable investors to buy shares of companies in certain segments instead of forcing them to buy one massive undervalued conglomerate.

But spinning off YouTube or Google Cloud could have negative long-term impacts for the companies inside Alphabet. YouTube ads benefit from access to users' entire histories with Google. While YouTube could still gain access to Google's ad targeting, the economics would change to look more like a Google Network site instead of a Google property. That would instantly decrease the value of YouTube as a stand-alone company.

Likewise, YouTube benefits from sister company Google Cloud and vice versa. If the two companies split off the mothership, Google Cloud could end up losing a massive customer in YouTube. That's a big reason why Amazon's management says it won't be spinning off Amazon Web Services -- it's its own biggest customer.

Even if a spinoff could provide a short-term increase in value across the board, the intertwine nature of Google's businesses means long-term value is best sustained by keeping everything in place. It also means that growth in YouTube also supports growth in Google's other businesses, so comparing it side-by-side with a stand-alone video streaming service's value doesn't capture the entire value of YouTube to Alphabet.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Alphabet Inc. Stock Quote
Alphabet Inc.
GOOG
$2,875.53 (1.52%) $43.17
Alphabet Inc. Stock Quote
Alphabet Inc.
GOOGL
$2,859.32 (1.36%) $38.29
Netflix, Inc. Stock Quote
Netflix, Inc.
NFLX
$616.47 (-0.21%) $-1.30

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
634%
 
S&P 500 Returns
141%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/02/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.