One of the more interesting stories of the week came from the Wall Street Journal on Wednesday – YouTube: 1 Billion Viewers, No Profit, suggesting that despite YouTube’s massive cultural significance the video site owned by Google for 8 years does not turn a profit:
The online-video unit posted revenue of about $4 billion in 2014, up from $3 billion a year earlier, according to two people familiar with its financials, as advertiser-friendly moves enticed some big brands to spend more. But while YouTube accounted for about 6% of Google’s overall sales last year, it didn’t contribute to earnings. After paying for content, and the equipment to deliver speedy videos, YouTube’s bottom line is “roughly break-even,” according to a person with knowledge of the figure.
By comparison, Facebook Inc. generated more than $12 billion in revenue, and nearly $3 billion in profit, from its 1.3 billion users last year.
The article lists no shortage of reasons for the lack of profit from the unit that is growing sales like gangbusters, but to be frank I am hard-pressed to think that some combination of subscription services (think NFLX, HULU), user generated content (existing YouTube), and original content (think NFLX) could not become a very profitable entity. There is a strong case to be made that the YouTube with $4 billion in trailing sales, growing at 30% a year, is the second largest Social Media property by sales and users to Facebook which is very profitable and trades at 13x expected 2015 sales.
Back in June (MorningWord 6/30/14: Should YouTube Try Googling Itself?) I made the case for YouTube being spun out of Google to unlock value given the multiples being applied to publicly traded social media properties:
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%.
As a separate publicly traded entity YouTube management would have to demonstrate profitability. I would even go a step further. If Google had no interest in separating any individual units from the core, then if they were to buy Twitter (as I have suggested in the past here), and combine with YouTube then they would in one fell swoop solve many of their problems in social media and the small threat that is posed by Twitter as the go to destination for real time search.
So what does that mean for the stocks? Well, Google just bounced off of massive long term technical support at $500. In the near term, a pull back to the stock’s 50 day moving average near $525 could be a good long entry. I suspect Google puts some of their $67 billion in cash to work and the right acquisition would see the stock go up by at least the purchase price. In my opinion it should be Twitter, but figuring out a way for investors to see a path to profitability at their fast growing YouTube would also help sentiment.
As for Twitter, I sold a long position 3.5% ago following better than expected earnings results earlier in the month. My concerns were simple, expectations are now very high, and in my opinion management’s reasons for weak subscriber growth is weak, and without a meaningful acceleration in user growth and engagement (Tweets were down during the Oscars Sunday night 47% year over year) then I think the stock is massively overvalued despite the fact that I think the company has a massive first user advantage and equally massive scarcity value. I am a buyer again in mid $40s, waiting for positive sentiment abate a bit, which has been a good trading strategy for me over the last year (read here from May, here from July and here from January)