YouTube's ad revenue has slumped for three straight quarters, but a big turnaround could be coming soon.
Alphabet's (GOOG -0.21%) (GOOGL -0.30%) video-streaming service is facing macroeconomic headwinds that are curbing ad spend on the platform. On top of that, a shift in viewing to its new Shorts format has weighed on revenue. But investors have several reasons to remain optimistic about the long-term growth of YouTube and Google overall. Here are three reasons YouTube could return to growth soon.
1. YouTube TV viewership is rising
YouTube TV is showing relative strength compared to the suffering pay-TV industry.
The live TV streaming service offered by YouTube added 300,000 subscribers in the first quarter, according to estimates from MoffettNathanson. That stands in contrast to every other pay-TV provider, all of which lost subscribers in the period.
It's worth noting it managed to add subscribers without the help of NFL Sunday Ticket. YouTube TV added the NFL Sunday Ticket package to its offerings in the second quarter, which should drive more sign-ups for the streaming service. It's offering a $100 discount for YouTube TV subscribers on top of a discount for customers signing up before June 6, which could draw some YouTube TV subscriber additions forward into the second quarter.
YouTube TV gives Alphabet a growing source of high-quality ad inventory. As marketers look to make the most of their ad dollars, that gives YouTube a big advantage over competing platforms.
2. Viewers are watching YouTube on their big screens
You don't need to be a YouTube TV subscriber to watch YouTube on your TV, and that's becoming an increasingly popular choice among viewers.
According to the company's internal figures, 45% of all YouTube viewership now takes place on a TV. That's up from less than 30% in 2020.
The growth of viewership in the living room gives YouTube another selling point for advertisers looking to shift more of their ad budgets away from linear TV programming. During Alphabet's first-quarter earnings call, management said YouTube's return on ad spend is 40% higher than that of linear TV, according to an analysis from Nielsen.
Where YouTube only captures a portion of the ad inventory on its YouTube TV service (networks own the vast majority of inventory), it controls 100% of the inventory seen by regular YouTube viewers. That positions it well as marketers continue to look for alternatives to linear TV advertising.
3. YouTube Shorts monetization is improving
YouTube has seen fast growth in the popularity of its Shorts format, but its monetization of that content still lags behind what it's gleaning from its normal videos. That should start to change soon.
The short-form video format is designed to compete directly with TikTok, which is seen as a major threat to YouTube. But as Shorts increases in popularity, that means less time spent on YouTube's existing long-form video format, which already has high monetization rates. Management is working to bring revenue from time spent with Shorts up to par with revenue from its standard video product.
As monetization rates improve for Shorts, YouTube will see its overall revenue growth reaccelerate as it laps the periods of no and low monetization for the format.
Turning the Google ad machine around
YouTube is an essential ingredient in the recipe for returning Google's ad revenue to growth.
Advertisers generally have pulled back on their marketing spending in 2022 and 2023 due to economic uncertainty. Google's network revenue has been particularly hard hit. YouTube sits somewhere between Google's network segment and its first-party search advertising efforts, and could be one of the biggest sources of growth for the overall advertising business as marketers ramp up spending again.
Even after a recent recovery in its share price, Alphabet's valuation doesn't seem to reflect the potential for revenue to continue rising at double-digit percentage rates for years to come. Investors who buy now could be rewarded by a strong contribution from YouTube to the top line over the next few years.
