Are Investors Undervaluing YouTube?
There’s a sleeping giant out there receiving 2,800,000,000 user visits per month from people sinking 7,500,000,000 hours into platform content. We’re talking about YouTube, Alphabet’s asset. It must be worth a small fortune, but investors never talk about it!
YouTube grows revenue at 35% year-on-year pace from ads that elicit direct responses like gameplay and app installs, and coronavirus has investors excited that this revenue might be recurring.
The holy grail of any secular growth stock is recurring revenue because it’s sticky and carries a low marginal cost to generate. YouTube’s ad revenue will rise and fall with marketing budgets over time, but the user base is the key ingredient, and it looks there to stay.
According to Sandvine, the lockdown increased internet traffic to YouTube by 15.94%, more than Netflix, Facebook, Instagram, and Google. If the platform can build out its premium subscription business, the market might view it as less cyclical than it is now and start trading its parent at a higher multiple.
There are bears taking the other side, however, and they argue that another ‘adpocalypse’ could be on the horizon. This refers to brands pulling ads after content creator controversies on the platform. YouTube wrestles with control over its own community. Other apps cater to shorter attention spans like Twitter and Snapchat, are becoming easier to use, and are hosting a more rapid exchange of ideas.
There’s no doubt that if YouTube can reinvent itself and keep up with competitors, it has epic potential post-corona. The Invstr community looks forward to buying it when it’s broken and set free from Google, although there are no signs of antitrust just yet. It’s one to watch!