Alphabet (GOOGL -1.44%) (GOOG -1.44%) just reported its 2022 fourth-quarter financials on Feb. 2. Revenue of $76 billion and diluted earnings per share of $1.05 both failed to meet what Wall Street analysts were expecting. And the stock took a dip after the market closed that day, as shareholders digested the news.
Beyond the headline numbers, there's a single area of the tech giant that deserves a closer look. Read on to find out one of the most important things that the smartest investors know about Alphabet's business.
It's a leader in video entertainment
There's no doubt that Alphabet's bread-and-butter business is Google Search, which represented 56% of total company revenue and 72% of all ad revenue in the most recent quarter. While this segment has been hit hard by softer macroeconomic conditions in 2022, it is still a key element of the Alphabet empire.
Its cloud infrastructure service also has received a lot of attention recently. Google Cloud was able to increase revenue 32% year over year in the latest quarter to $7.3 billion. This growth exceeded the gains posted by its bigger competitors in the space, Amazon Web Services and Microsoft Azure.
Image source: The Motley Fool.
However, shareholders probably need to pay more attention to YouTube, which is Alphabet's super successful video streaming platform. As the chart above shows, YouTube generated just under $8 billion in revenue in the latest quarter. This missed analyst expectations and was down 7.8% versus the fourth quarter of 2021 due to a pullback in ad spending.
It's time to start recognizing YouTube as a formidable streaming competitor. Netflix, widely regarded as the trailblazer of streaming video entertainment, pulled in sales under $7.9 billion in the last three months of 2022. YouTube is literally on par with Netflix on revenue.
And when it comes to actual usage, YouTube is ahead of Netflix. According to data from Nielsen, YouTube commanded 8.7% of total TV viewing time in the U.S. in December, compared to Netflix's 7.5%.
Keep in mind that the figure in the chart doesn't include YouTube's non-advertising revenue, namely for YouTube Premium, YouTube Music, and YouTube TV subscriptions. These are included in the Google Other slice in the chart.
YouTube Premium and Music have a total subscriber count of 80 million. And it was reported last summer that YouTube TV had surpassed Walt Disney's Hulu Live TV in terms of customers, making YouTube TV the most popular internet-enabled TV subscription service domestically.
Bolstering YouTube TV's value proposition even more is the addition of free ad-supported channels, as well as the option to pay for NFL Sunday Ticket starting this fall.
It's hard to deny the attractive platform characteristics of YouTube. The service has long been monetizing viewer attention with advertisements. Subscriptions could become a bigger piece of the pie. And if management can somehow find ways to implement shopping on a bigger scale, that will likely create another high-margin source of revenue from transaction fees.
"Lastly is our focus on a shoppable YouTube," said chief business officer Philipp Schindler on the fourth-quarter earnings call. "It's still nascent, but we see lots of potential in making it easier for people to shop from the creators, brands, and content they love."
YouTube is well on its way to becoming an all-inclusive entertainment source for many more people. And this is a powerful value driver for Alphabet.
If YouTube was a separate publicly traded entity, what would its value be? Based on many of the positive attributes I've outlined, a valid case can be made that it would be worth more than Netflix's current market capitalization of nearly $160 billion.
If this doesn't make shareholders want to start paying more attention to YouTube, I'm not sure what will.
