Alphabet (GOOGL 0.42%) (GOOG 0.58%) is not typically the first company that comes to mind when investors think about video-streaming stocks. However, a new YouTube service could change that. Is the streaming industry about to get even more crowded as Alphabet enters the market? Let's assess.
Alphabet moves into streaming
YouTube reportedly plans to launch a channel store for video-streaming services and is talking with entertainment companies about participating in the platform. The streaming marketplace would allow consumers to subscribe to various services directly through the YouTube App, similar to hubs already offered by Amazon, Apple, and Roku.
The new marketplace has been in development for 18 months and is expected to be released by the fall of 2022. Alphabet is now at work convincing various streaming platforms that the YouTube service is worth joining and giving up a cut of the revenue generated for the privilege. YouTube's argument is not baseless; along with its attractive number of 2.6 billion users, the video platform is the most used service on which other companies share trailers for their new content.
As for what Alphabet stands to gain, a move to create a new revenue stream via streaming is not a bad idea considering the company's second-quarter results for 2022. On July 26, it reported weaker-than-expected Q2 earnings, as many of Alphabet's segments came in just a few points below expectations. For instance, the company's earnings per share landed at $1.21 versus the expectation of $1.28, while revenue hit $69.69 billion versus previous projections of $69.9 billion.
Similarly, YouTube advertising revenue reached $7.34 billion, which had been projected at $7.52 billion. Google Cloud revenue also slightly missed the mark, making $6.28 billion when $6.41 billion was expected. All in all, revenue growth fell to 13% in Q2 2022 from 62% the previous year.
The most glaring deceleration in revenue in Alphabet's report came from YouTube, where sales rose 5%, a stark contrast to the 84% jump it made exactly a year ago. Considering YouTube's slowed growth, a new service that allows the company to take a slice out of the $80.83 billion streaming-industry pie isn't a bad idea.
Should Netflix and Disney be worried?
As the titans of the industry, Netflix (NFLX +1.15%) and Disney (DIS 0.15%) stand to gain the least from Alphabet's coming YouTube service. The two companies rank first and second in number of streaming subscribers, with Disney No. 1 at 221 million spread among Disney+, Hulu, and ESPN+. Meanwhile, Netflix is a close second with 220.7 million subscribers worldwide. The immense popularity of Netflix and Disney means those platforms' participation in YouTube's channel store will not benefit them as much as it would smaller services.
YouTube's attempt to take a piece of the streaming pie is not likely to put Alphabet in direct competition with Netflix and Disney, but it does have the potential to boost smaller platforms enough to steal subscribers from the giants. Smaller players such as Comcast's Peacock, Paramount+, and AMC Networks' slew of streaming offerings would benefit greatly from joining a service that attracts more than 122 million daily users.
Netflix and Disney could see their competition grow stronger as Alphabet profits from their success, weakening the streaming titans' hold on the market.
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Key Data Points
What's next
Despite an 8% dip in Alphabet's stock between July 21 and July 26 after the company reported less-than-ideal Q2 2022 results, the stock has climbed significantly. As of August 15, the stock had risen 16.2% since July 26, reaching a height it hadn't seen since May. However, the stock is about 17% down since January, which may suggest it's not done rising. Alphabet's new streaming marketplace has the potential to boost revenue and restore the growth YouTube enjoyed in 2021, meaning investors might have the opportunity to buy the stock at a bargain before the new service launches.
As for Netflix and Disney, those stocks are unlikely to feel any immediate effects from YouTube's service. The real test will be which smaller players sign up for YouTube's marketplace, which will potentially create more competition for Netflix and Disney. It also might be worth investing in the more minor streaming services that join YouTube's channel store because a boost to their businesses could strengthen their stocks.
