Tech

YouTube Valued at $455B, Projected Ad Revenue Growth

YouTube valued at $455 billion, over 50% higher than Netflix, with ad revenue expected to hit $42 billion by 2025.

By Alex P. Chase

7/10, 09:20 EDT
Alphabet Inc.
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Key Takeaway

  • Needham & Co. analysts value YouTube at $455 billion, suggesting it is significantly undervalued within Alphabet's $2.3 trillion market cap.
  • YouTube's ad revenue is projected to grow 17% to $37 billion in 2024 and another 14% to $42 billion in 2025.
  • Goldman Sachs raised Alphabet's price target to $211, citing higher long-term YouTube ad revenue growth assumptions.

YouTube's Hidden Value

Investors currently value Alphabet Inc. at $2.3 trillion, recognizing its dominance in internet search and AI innovation. However, analysts at Needham & Co. argue that this valuation underestimates the true worth of YouTube, Alphabet's streaming unit. According to a July 3 note by Needham analysts Laura Martin and Dan Medina, YouTube alone is worth at least $455 billion, which is over 50% higher than Netflix Inc.'s market cap.

“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 in an interview. These risks include concerns that AI might displace search, a threat unrelated to YouTube. The analysts suggest that a potential separation of YouTube from Alphabet could benefit investors interested in YouTube's streaming dominance and those focused on Alphabet's AI growth. Needham estimates that making just 5% of YouTube separately tradable could add $15 per share to Alphabet's stock.

Streaming and Ad Revenue Growth

YouTube has a dominant and growing share in the streaming market, as consumers increasingly shift from broadcast and cable TV to streaming platforms. According to Bloomberg estimates, YouTube's ad revenue 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 for expansion.

A recent TD Cowen survey of streaming platforms showed that while Netflix still leads in most TV categories, YouTube is often not far behind and is the top choice for watching content on mobile phones. "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."

Alphabet's Broader Strategy

Alphabet's structure has long been criticized for obscuring the true value of its different businesses. Regulatory threats to break up the company have been cheered by many investors. However, there are few signs that Alphabet or its megacap tech peers are considering any separations in the near term. "Many companies when they mature, they start getting hedge funds or activists coming in and demanding that you spin off a company," said Quincy Krosby, chief global strategist at LPL Financial. "We’re not there with megacap tech yet."

Alphabet has outperformed most of its Big Tech peers this year, outpacing Microsoft Corp, Apple Inc., and Amazon.com Inc. Nvidia Corp. has led the pack, soaring 165% due to high demand for its AI chips. Goldman Sachs analysts, led by Eric Sheridan, reiterated their buy rating on Alphabet and raised the price target to $211 from $195, partly due to higher medium-to-long-term YouTube ad revenue growth assumptions.

Street Views

  • Laura Martin and Dan Medina, Needham & Co. (Bullish on YouTube):

    "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."

  • Quincy Krosby, LPL Financial (Neutral on Alphabet's structure):

    "Many companies when they mature, they start getting hedge funds or activists coming in and demanding that you spin off a company. We’re not there with megacap tech yet."

  • Robert Conzo, The Wealth Alliance (Bullish on YouTube):

    "YouTube is really vying for positioning against Netflix in a big way. 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."

  • Eric Sheridan, Goldman Sachs (Bullish on Alphabet):

    "[The subscriptions, platforms and devices segment] holds YouTube [and] is a key growth driver and an increasing portion of gross revenues... partly due to higher medium-to-long-term YouTube ad revenue growth assumptions."

  • Divyaunsh Divatia, Janus Henderson Investors (Cautiously Optimistic on Alphabet's Gen AI strategy involving YouTube):

    "YouTube remains a beneficiary from being in the Google Web services ecosystem... continued additional disclosure should help the street to more thoughtfully model the topline growth & cost drivers and value this business."