Ask most quality-focused investors out there, and they'd likely agree that Alphabet (GOOGL 0.79%) (GOOG 0.85%) is one of the best companies in the world. It has some of the most dominant internet properties, the most notable of which is Google Search, and it generates free cash flow like it's nobody's business. However, the stock has been under pressure over the past year and a half, down 30% from its peak.
There's one segment of this FAANG stock that could unlock some serious shareholder value if it were a stand-alone entity separate from the parent. I'm talking about YouTube. Here's one ridiculously obvious reason why Alphabet should spin off the video entertainment platform.
Image source: Getty Images.
Spinning off YouTube can create massive value for shareholders
If YouTube were to be spun off, existing Alphabet shareholders would receive stock in the newly formed organization. And this could be a boon for investors. The clear reason for why YouTube should be its own publicly traded entity is because on its own, it could attract an impressive valuation as a pure-play streaming stock.
It is estimated that YouTube has 2.6 billion monthly active users who come to the site with intent on exactly what they want to watch. And according to data from Nielsen, YouTube commanded 7.8% of total TV viewing time in the U.S. in the month of March.
This is an impressive stat because it puts YouTube ahead of the longtime dominant streaming enterprise Netflix in terms of viewing time. Netflix currently has 232.5 million subscribers. And the business generated $31.9 billion in revenue over the trailing-12-month period. As of this writing, Netflix carries a market cap of $146 billion.
In 2022, YouTube generated $29.2 billion in ad revenue, up just 1.4% year over year as a result of the softer advertising market. But the sales number is up 162% from $11.2 billion in 2018, the earliest data available. It's worth mentioning what other revenue sources are a part of YouTube besides ads, like YouTube Premium and Music, which count 80 million subscribers (including free trials). Revenue from these is counted separately in the "Google other" category.
YouTube TV, the segment's cable TV rival that is completely internet based, is also a part of the mix. "In Q2, YouTube TV surpassed 5 million subscribers, including trialers," CEO Sundar Pichai said during the 2022 second-quarter earnings call last July. This figure makes YouTube TV more prominent than its chief competitor, Hulu + Live TV. YouTube recently agreed to pay $2 billion annually for the rights to NFL Sunday Ticket, starting later this year. This will certainly help to draw in even more subscribers.
Taking all of these favorable factors into account, it's not a stretch of the imagination to believe that YouTube would likely be valued higher than Netflix. YouTube's main video-on-demand service benefits from network effects, the strongest economic moat around that makes it nearly impossible for rivals to compete with. This should warrant a higher valuation multiple if YouTube were a stand-alone company.
A few years back, Needham analyst Laura Martin estimated that YouTube could be worth $300 billion on its own. But this was on Oct. 29, 2019. In the roughly three and a half years since, Alphabet's stock has climbed 67%, and YouTube's revenue has soared, so Martin's valuation estimate would probably be much higher today.
YouTube would get its own coverage from other sell-side research analysts on Wall Street, which would draw more attention to it from institutional and individual investors. Consequently, I'm sure YouTube would find its way into many portfolios due to what I outlined above. And at $300 billion, likely understating its true worth, YouTube would be valued higher than well-known companies like Coca-Cola, Bank of America, and Costco Wholesale. This means that Alphabet's current market cap of $1.36 trillion likely falls short of its intrinsic value.
