Back in October 2006, when Myspace was the dominant online social network, Google made their largest acquisition to date, a $1.65 billion deal for YouTube. As with any new medium, some investors probably didn’t even know what YouTube was, and the ones that did most likely thought of it as a a dogs on skateboards video site with little revenue that would only add marginally to Google’s dominance in internet search and related advertising.
Almost eight years later, YouTube is the second largest “social network” by revenues (some analysts expect $4 billion in sales in 2014, which has been growing and expected to continue at about 40% a year) only second to Facebook, which had nearly $8b billion in sales last year with expected growth of 50% to nearly $12 billion in 2014. While many market pundits (including myself) dismiss Google’s social efforts largely because of Google Plus’s inability to make a dent into Facebook’s dominance, Google through YouTube is sitting on one of the largest social properties on the web.
Why is this interesting? I were a Google shareholder (which I am not) I would be a tad concerned about the company’s recent trend of missing earnings estimates. Those misses have a lot to do with the company’s spending (acquisitions, hiring, R&D/ business development), but also can be attributed to the secular trend of computing moving from desktops to mobile devices that offer lower profitability for advertising and obviously less real estate in-which to place ads. The company is also facing the law of large numbers as analysts expect them to hit $50 billion in sales in 2014, growing at 10% year over year, which would mark its slowest growth since 2009.
So maybe the valuations placed on public social networks, and the almost hilarious prices paid for private ones like WhatsApp’s $19 billion (cash and stock) price tag from acquirer Facebook, could cause the Google guys to get in on the action. As a standalone, YouTube is expected to have more revenue than Twitter and LinkedIn combined in 2014, possibly growing at a similar pace. If you were to apply a number somewhere in the middle of TWTR’s 19x sales 2014 multiple, and LNKD’s 11x, you get about 15x the rumored $4 billion sales and you could have a $60 billion public market value. I am hard pressed to think that Google’s current $390 billion market cap reflects that sort of value when YouTube’s contribution to Google’s total revenues is less than 10%.
Investors are well aware that the parts are usually worth more alone than as part of the whole. Carl Icahn’s brief activist foray into EBAY was predicated on that very principle, though he did not succeed in getting management to spin off PayPal. Yahoo’s rally from mid-2011 to today was mainly based on the eventual IPO of Alibaba, which is slated to take place in August. With all of that in mind, perhaps Larry and Sergey will be looking at a YouTube spin-off in the future if the stock stagnates.