Alphabet (GOOG -1.96%) (GOOGL -1.97%) investors should keep a closer eye on YouTube's financial performance in 2023 because there's a key seismic shift on the horizon.
Thanks to ByteDance's TikTok, short-form video has rapidly become one of the most dominant content formats in history. That's a growing challenge for social media companies and traditional video platforms like YouTube, as TikTok continues to attract more users and more advertising dollars.
But YouTube is rising to the challenge and finding great success in the process. Here's why it could be one of the most important parts of Alphabet's business.
The TikTok effect
TikTok has ushered in perhaps the greatest shift in the way we use social media in the industry's history. In fact, TikTok isn't very social at all. It relies on its ability to stream entertaining content to keep users engaged -- connecting them to family and friends has become a secondary factor. The platform is a closer relative to YouTube than it is to say, Meta Platforms' Facebook, for example, except it's much better (in my view).
If you've used YouTube, think about the experience. You browse through a library of videos, select one, it loads, you sit through one or two ads, and then your video plays. It's clunky and certainly doesn't jibe with the increasingly short attention spans of younger generations. That's where TikTok shines, because from the moment a user opens the app, the first thing they see is content, and the next slice of entertainment is just one swipe away.
It's exciting, engaging, and frictionless, which is why the platform has become the fastest-growing in history, with over 1 billion monthly active users globally. Plus, it has an incredibly young audience, with 32.5% of users between 10 and 19 years old, and 62% of users under 29. That's a big deal for advertisers who like to connect to their target market as early as possible.
Two years ago, YouTube identified this competitive threat and decided to launch Shorts, a short-form platform of its own. It has been a raging success so far, boasting 1.5 billion monthly users already, who view 30 billion pieces of content per day.
But there are some real challenges
Given the difference in functionality I described earlier, users see fewer ads on TikTok and Shorts than they would watching traditional YouTube videos. Therefore, short-form video is a little harder to monetize, and Alphabet says it's leading to a slowdown in revenue growth for YouTube overall because more users are engaging with that content instead.
Combined with a difficult economic climate, where consumers are spending less money and businesses are trimming their marketing budgets, YouTube's advertising revenue has plateaued in recent quarters.
That's not the only challenge. Since content is fed to users through advanced artificial intelligence algorithms, and not necessarily through their family and friends, it means short-form platforms rely heavily on creators. They need to monetize their videos in order to create more, so it's not cheap to maintain a platform that is effectively entertainment-focused rather than network-focused, where most of the posts come free.
Alphabet says it will introduce new initiatives for creators this year, including revenue sharing on Shorts, and investing in new video tools specifically for mobile.
The upside for Alphabet stock could be enormous
Despite the above challenges, there are some substantial benefits to the short-form video format. As of October 2022, TikTok users were spending an average of 22.9 hours per month on the platform, which was only slightly below YouTube's 23.4 hours -- considering YouTube has been around since 2006, TikTok has truly risen to the top at warp speed.
For context, Instagram is used about half as much as TikTok (11.7 hours per month), highlighting how traditional social media might be getting unseated.
TikTok's parent company, ByteDance, isn't publicly listed, so its financial results are the subject of speculation based on leaks and estimates. However, it's well documented that TikTok generated about $4 billion in revenue during 2021, and once its 2022 results are officially in the books, it's expected that figure will fall somewhere between $10 billion and $12 billion -- potentially tripling year over year at the high end of the range.
YouTube is still well ahead with $29.7 billion in revenue over the last four quarters, but it's TikTok's growth rate that should catch investors' attention. Shorts could reignite the growth engine at YouTube, especially since the company expects the monetization gap between short-form and traditional video to close over time.
Of course, there are plenty of other reasons to own Alphabet stock, especially now that it's trading at its cheapest level in years on both a price-to-earnings and price-to-sales basis. But YouTube might present one of the most lucrative future opportunities for the company.
