Investors attach a US$2.3-trillion valuation to Alphabet for its status as an internet search behemoth and AI innovator. Yet even that massive figure underplays YouTube’s true worth, according to analysts at Needham & Co.
The streaming unit is one of the world’s most valuable media companies and worth at least $455-billion on its own, Needham’s Laura Martin and Dan Medina wrote in a 3 July note. That’s more than 50% above Netflix’s market cap.
Alphabet’s structure means it doesn’t get enough credit for its disparate businesses — especially YouTube, the analysts argue. They have a buy rating on the stock and a price target of $210, some 10% above 5 July’s record close.
“There is this hidden value in YouTube that people can’t separately trade, and so it’s trapped in Google in a conglomerate that has a lot of other risks,” Martin said separately in an interview. Those include worries that artificial intelligence might displace search, a threat that has “nothing to do with YouTube”, she said.
A potential separation would benefit those keen to invest in YouTube for its dominance in streaming, but also those who admire Alphabet more for its role in the explosive growth of AI. If even just 5% of YouTube was separately tradeable, this would add $15/share to Alphabet stock, Needham says.
“Conglomerates knock buyers out of the market because investors are like, ‘Well, I like these three pieces but I don’t like this one, so I’m just not going to buy it,’” said Martin.
Of course, the Needham analysts aren’t the first to notice this. Alphabet’s sprawling structure has long been criticised for obscuring the true value of its different businesses. Regulatory threats to break up the company over the years have been cheered by many investors, rather than viewed as a threat.
Streaming powerhouse
There are also few signs that Alphabet or its megacap tech peers are contemplating obliging investors with any separations in the near term, according to Quincy Krosby, chief global strategist at LPL Financial.
“Many companies when they mature, they start getting hedge funds or activists coming in and demanding that you spin off a company,” she said. “We’re not there with megacap tech yet.”
Alphabet has outperformed most of those Big Tech peers this year, outpacing Microsoft, Apple and Amazon.com. Nvidia has run ahead of the pack, soaring 165% thanks to the insatiable demand for its so-called AI chips.
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As for YouTube, it has a dominant and growing share in streaming, as consumers shift to such platforms and away from broadcast and cable TV. Ad revenue from the platform is expected to grow by nearly 17% to $37-billion in 2024 and by another 14% to $42-billion in 2025.
Alphabet’s revenue from subscriptions, platforms and devices, which includes YouTube subscriptions, is also poised to expand in the coming years. At Netflix, revenue is expected to be about $38.7-billion in 2024, with almost all of that derived from streaming, while YouTube accounts for about 10% of its parent’s total sales.
A recent survey of streaming platforms by TD Cowen showed that while Netflix still dominates in most TV categories, YouTube is often not far behind. And it’s the top choice for watching content on a mobile phone.
“YouTube is really vying for positioning against Netflix in a big way,” said Robert Conzo, chief executive at The Wealth Alliance. “They’re going to be a force to be reckoned with in the future when it comes to content and playing in that space that Netflix has dominated so strongly.”
While AI has been a major force lifting Alphabet shares to recent record highs, the subscriptions, platforms and devices segment that holds YouTube is a key growth driver and an increasing portion of gross revenues, Goldman Sachs analysts led by Eric Sheridan wrote in an 8 July note.
Goldman reiterated its buy rating on Alphabet and boosted the price target to $211 from $195, partly due to higher medium-to-long-term YouTube ad revenue growth assumptions.
And there are other good reasons for Alphabet to keep YouTube under its umbrella. The platform is “a key pillar of Alphabet’s gen AI strategy”, according to Divyaunsh Divatia, research analyst at Janus Henderson Investors.
“YouTube remains a beneficiary from being in the Google web services ecosystem, but continued additional disclosure should help the street to more thoughtfully model the top-line growth and cost drivers and value this business,” Divatia said.
Beyond YouTube, Needham’s Martin also sees value in breaking off other pieces of Alphabet’s business — such as its ad tech segment, currently part of a lawsuit with the US department of justice. “Alphabet is worth more in pieces than it is together,” he said. — Carmen Reinicke, with Subrat Patnaik, (c) 2024 Bloomberg LP
