YouTube has transformed itself from a place to watch funny cat videos, explorations of dance history, and Charlie biting fingers into one of the largest media companies in the world. But, in 2006, when Google bought YouTube for $1.65 billion , it was the early days of the online video boom. The staying power of the platform, which was founded just a year before the transaction, was still up in the air. Eighteen years later, investors in Google-parent Alphabet are now faced with a different, strangely positive kind of uncertainty. Could this sometimes overlooked business be worth as much as Netflix at nearly $400 billion? And now, where does it go from here? YouTube is just one of Alphabet’s many attention-grabbing assets. Waymo, its robotaxi venture, has been stealing headlines in recent months with launches in new markets and a high-profile Uber partnership. Google Cloud, a primary focus of investor attention in the past half-decade, is back seeing an acceleration in sales growth , thanks to artificial intelligence, along with improved profitability. Then, of course, there’s Google Search and the company’s hefty investments into AI to ensure its foundational business isn’t dethroned by upstart services like ChatGPT from Microsoft -backed OpenAI. Throw in a drumbeat of antitrust talk — and, most recently, the hype around quantum computing, which helped kickstart a furious, more than 11% December rally for the stock. With so much else for investors to focus on, it can sometimes feel as if YouTube is just streaming in the background on mute. But its financial and strategic importance, especially within Alphabet’s broader AI initiatives, deserves to be heard at full volume. “YouTube is an overlooked piece in the Alphabet story, but it shouldn’t be,” said Jeff Marks, the Club’s director of portfolio analysis. Some of this dynamic is arguably Alphabet’s own doing: YouTube’s integration within the Google Services unit may leave its true potential hidden. Alphabet discloses YouTube’s ad revenues, but it doesn’t regularly reveal its combined revenue, which includes subscriptions to offerings such as ad-free YouTube Premium, YouTube Music, and YouTube TV, its cable-like streaming package. It also does not detail YouTube’s profitability. Even without the full financial picture, some on Wall Street argue that spinning off YouTube could unlock massive shareholder value. And, while that seems unlikely, it reflects the media juggernaut’s stunning ascent over the nearly two decades of Google ownership. GOOGL YTD mountain Alphabet’s year-to-date stock performance. YouTube is the “crown jewel” of the Alphabet portfolio and possibly its “most valuable franchise,” D.A. Davidson analyst Gil Luria said in a CNBC interview. Luria touted YouTube’s ability to expand user-generated content into a “full-blown media company,” while also competing in social media against the likes of ByteDance’s TikTok and Meta Platforms ‘ Reels. YouTube Shorts was created, and it has become an important part of the platform. YouTube’s wide content offerings — which also include video podcasts and live sports through its YouTube TV and NFL Sunday Ticket package — cater to a broad range of viewer interests. YouTube’s one-stop shop format distinguishes YouTube from competitors, Luria explained. Indeed, it has come a long way since the days of “Evolution of Dance” and “Charlie Bit My Finger,” which were among the earliest viral videos found on the platform. “It competes against the streamers, against the broadcasters, social media companies, but from a consumer perspective, it’s one destination. That’s part of what makes YouTube such a special property,” the analyst added. Alphabet’s dominant Google Search business has historically captured the lion’s share of investor attention — and currently, it still accounts for more than half of companywide revenue. Google Cloud represented about 13% of sales in the third quarter but commands outsized scrutiny from investors considering it’s a relatively younger business. It’s the third-biggest cloud behind Amazon Web Services (AWS) and Microsoft’s Azure. Google Cloud revenue was only broken out for the first time in 2018 and is now a measuring stick for the success of Alphabet’s hefty generative AI investments. However, some of YouTube’s recent milestones have been hard to ignore. Consider this: YouTube’s advertising and subscription revenue surpassed $50 billion in the 12 months ended in September, CEO Sundar Pichai said on its third-quarter earnings call. That is equal to nearly 15% of Alphabet’s $340 billion in revenue over the same period. Comparing that $50 billion figure to other media companies really puts it into perspective. In the same 12 months as YouTube’s $50-plus-billion disclosure, Disney’s entertainment and sports revenue totaled $58.8 billion. While we don’t know YouTube’s exact figure, it seems likely that Disney was bigger. But that’s where the debate ends. Netflix ‘s total revenue in its current fiscal year ended in December is expected to be roughly $39 billion, according to FactSet. Analysts see that rising to $43.7 billion next year. Comcast ‘s content-and-experiences business — home to NBCUniversal and its theme parks, movie studio and cable channels, including CNBC — is projected to do $45 billion in revenue this year and a little less than that in 2025, FactSet data shows. Wall Street sees CBS-owner Paramount Global generating roughly $29 billion in revenue this year and next, while HBO parent Warner Bros. Discovery is estimated to bring in $39.6 billion in 2024 and $39.8 billion in 2025. Viewership data also illustrates YouTube’s strong standing in the media landscape. In July, YouTube became the first streaming platform to break 10% of total TV usage, according to Nielsen. That month, Netflix was at roughly 8.4%, per Nielsen data. Elsewhere, a recent survey from the Pew Research Center found 90% of teens use YouTube — far ahead of No. 2 TikTok at 63%, and Meta’s Instagram, in third, at 61%. Sports, AI and shorts As YouTube continues to convert its strong viewership into more dollars, subscriptions are a growing part of the strategy, analysts say. In Alphabet’s third quarter, YouTube ad revenue totaled $8.9 billion, up about 12% year over year; that represents roughly 10% of companywide sales in the quarter. Exact figures on YouTube’s subscription revenue were not disclosed for the quarter. What the company did say, though, was it generated $10.7 billion in “subscription, platforms and devices” revenue, up 28% on an annual basis. “We continue to have significant growth in our subscription products, driven primarily by YouTube TV and YouTube Music, Premium, as well as Google One, primarily due to increases in the number of paid subscribers,” CFO Anat Ashkenazi said on the call. Ben Reitzes, analyst at Melius Research, said YouTube’s subscriptions are going to be a key driver that grows “much faster than the ad business.” The ad-free YouTube Premium and cable competitor YouTube TV appeal to cord-cutters who are looking for cost-effective alternatives to traditional pay-TV packages. Reitzes described these recurring revenue streams as “predictable and sustainable,” positioning subscriptions as the backbone of YouTube’s monetization strategy. While YouTube TV is getting a little less cost-effective for subscribers, it should be good for the bottom line, assuming it does not lead to elevated churn or a major slowdown in new members coming onto the platform. Starting Jan. 13, the monthly price of YouTube TV’s base package will increase to $82.99 to help “keep up with rising content costs,” the company said . The company’s previous price hike to $72.99 a month went into effect in April 2023 . The YouTube TV subscription has had a series of price increases from when it first rolled out at $35 a month in 2017. A key to bolstering subscriptions is live sports, with NFL Sunday Ticket, in particular, representing a major draw for consumers. If you’re competing for viewer time, you have to be in sports,” D.A. Davidson’s Luria said, calling it “one of the most effective ways to drive user engagement and attract valuable advertising.” Reitzes echoed this sentiment, noting that YouTube TV’s sports offerings cater to the next generation of viewers. Sports on YouTube TV “will make more people subscribe,” he added. There’s no end in sight for sports to be able to stream live.” Alphabet is nearing the end of the second season of a seven-year deal, worth $2 billion annually , for Sunday Ticket, which allows football fans to watch out-of-market games on CBS and Fox. Jim Cramer has described the NFL Sunday Ticket as the “most valuable advertising real estate.” But he has also criticized Alphabet executives’ messaging on the benefits of the package, suggesting that it prevents investors from fully appreciating its value. “YouTube is doing incredibly well. They got the NFL (Sunday Ticket) rights. They don’t talk about it” nearly enough, Jim said Monday. In addition to live sports, generative AI figures to have a bigger role in YouTube’s future. As the entire media world grapples with that gathering force, YouTube has the advantage of being owned by one of the world’s largest technology companies with a strong track record of AI innovation . YouTube stands to benefit both on the content creation side and the monetization side through increased ad sales, analysts say. AI will further “enhance YouTube’s content ecosystem by helping creators produce more videos,” Reitzes said. In turn, AI-generated videos and tools will lead to more opportunities to show ads. This strategy, Reitzes said, is essential as YouTube faces increasing competition from digital heavyweights including Amazon and Netflix. YouTube Shorts, another AI-powered tool, complements this effort by enabling quick content production. Already, 70% of YouTube’s monthly active channels are uploading shorts, with more than 70 billion daily views. It’s quickly becoming a prime spot for advertisers. What’s it all worth? YouTube clearly has a lot going for it. What’s less clear is whether that’s fully appreciated by Wall Street as part of the larger Alphabet, which currently has a market capitalization of around $2.4 trillion. In general, it’s not uncommon for investors to ponder what an attractive business owned by a sprawling corporate parent could be worth on its own. Fellow Club holding Honeywell and its aerospace business is a t imely example . When doing this thought exercise for YouTube, Netflix is a common point of reference. YouTube “could be worth as much as Netflix’s $400 billion valuation considering it gets more eyeballs in the United States and generates similar revenues,” the Club’s Marks said. Similarly, in a note to clients earlier this year, MoffettNathansen estimated that YouTube could be valued between $360 billion to $400 billion, based on a comparison of the platform to peers like Meta and Netflix. Any sort of head-to-head comparison, however, is difficult without fully knowing YouTube’s margins and overall profitability. But on this point, it’s worth noting that YouTube benefits from so much of its content being created by other people and media organizations. On the YouTube TV side, there are costs associated with broadcast rights and distribution agreements — recall, “rising content costs” is the stated reason for the looming price jump. The clear advantage is on the traditional YouTube side, where creators upload their content to the platform and receive a cut of the ad dollars shown before and sometimes during their videos. That’s in stark contrast to Netflix, which produces many shows and movies in-house and takes on those associated costs ahead of time. There’s also the reality that as much as some investors might dream about the chance of owning YouTube as a standalone company, it’s probably not going to happen any time soon — if ever. Reitzes said Alphabet may argue against spinning off YouTube, given the platform’s “synergistic” role in the company’s broader AI strategy. YouTube’s vast user-generated data can be leveraged to train large language models (LLMs), which underpin generative AI applications and enhance AI initiatives across Alphabet’s portfolio as a result, Reitzes argued. He added that YouTube’s data can be used to improve the performance and user experience of Google Search — and vice versa. “When a user searches for things (on Google), the YouTube integration drives more people to YouTube,” Reitzes explained. By understanding user behavior on YouTube, Google can deliver better content recommendations and personalize user interactions across its platforms. The main takeaway: Some portion of YouTube’s value is derived from its common ownership within Google. In theory, another route to a standalone YouTube could be a forced divestiture as part of an antitrust enforcement action. And yet, despite YouTube’s mounting importance to the Alphabet investment story, the platform has not been in the crosshairs of the Justice Department’s ongoing antitrust battle against Google. The DOJ’s proposed remedies in its successful case over Google’s search-engine dominance are focused on splitting off other properties, such as the Chrome internet browser and the Android operating system, as well as prohibitions on its default search agreements with companies such as Apple and Samsung. Alphabet has criticized the remedy proposals and plans to appeal the judge’s initial verdict, as well. Still, should pressure mount on Alphabet to break off YouTube – whether from the DOJ or an activist investor – Luria believes it would “unlock shareholder value.” Then again, YouTube’s value has soared during its time under Alphabet’s roof. And, as YouTube approaches its 20th birthday, it has all the tools and eyeballs necessary to deliver even more while staying put. For Alphabet shareholders, either outcome would be a win. (Jim Cramer’s Charitable Trust is long GOOGL, AMZN, AAPL, HON, MSFT, META. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
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YouTube has transformed itself from a place to watch funny cat videos, explorations of dance history, and Charlie biting fingers into one of the largest media companies in the world.
But, in 2006, when Google bought YouTube for $1.65 billion, it was the early days of the online video boom. The staying power of the platform, which was founded just a year before the transaction, was still up in the air.
Eighteen years later, investors in Google-parent Alphabet are now faced with a different, strangely positive kind of uncertainty. Could this sometimes overlooked business be worth as much as Netflix at nearly $400 billion? And now, where does it go from here?
