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Fine-Tuning the YouTube Picture

This moaty business should drive Alphabet’s earnings higher.

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We have taken an in-depth look at Google’s YouTube, as we believe this moaty business has been underappreciated by the market and may be a more important contributor to holding company  Alphabet’s (GOOG)/(GOOGL) wide economic moat than commonly believed. While Alphabet does not provide much color regarding YouTube or other businesses under Google, we looked at the total addressable digital ad market, along with potential streaming video subscribers, and estimate that the business could be worth as much as $102 billion, or about 15% of Alphabet’s overall market capitalization--62 times more than Google paid for it 11 years ago.

YouTube was founded in February 2005 and quickly emerged as a leading site for video posters and viewers. Google spotted the potential exponential growth of YouTube’s users and content library early on and acquired the company in November 2006 for $1.65 billion, a high price for a service that was earning minimal revenue at the time. The deal was a shrewd move in retrospect, in light of the tremendous network effect the business has built over the past decade.

Ali Mogharabi has a position in the following securities mentioned above: T, AAPL, CMCSA. Find out about Morningstar’s editorial policies.