Who will win the streaming wars? Netflix got off to a great start as the first company to break 100 million and 200 million subscribers. Then Disney caught up, and eclipsed Netflix’ subscriber base last quarter. But they’re not alone. Roku, Apple and Amazon all have offerings to woo consumers. And yet there is a good chance, the winner will be none of the above.
Who Will Win The Streaming Wars?
Alphabet’s YouTube division is launching a channel store for video streaming services and is building relationships with entertainment firms so consumers can subscribe directly via the YouTube App.
The idea isn’t revolutionary. Roku has a hub that does just this. But Alphabet has the viewers, capital, and resources to dislodge all the current players, or at the very least muscle its way into a commanding market share.
Will other streaming platforms be willing to pay YouTube a piece of the pie to access those eyeballs?
After all, the YouTube platform has an astonishing 2.5+ billion users it can target.
The Alphabet Dilemma
The motivation for Alphabet to pursue this revenue growth channel couldn’t have come at a better time.
YouTube revenue came in under expectations during the last quarter. The company reported YouTube ad revenue of $7.3 billion vs a forecast of $7.5 billion. The company as a whole reported disappointing revenue growth, falling from 62% a year prior to just 13% in Q2.
Worse still, YouTube growth slowed to an almost standstill when year over year comparisons are made. While a year prior, growth had come in at 84%, it was just 5% this past quarter year over year.
Alphabet’s dilemma is the law of large numbers hurts its year over year comparisons. A billion dollar company growing double digits in percentage terms is impressive. But Alphabet revenues orders of magnitude larger so to make a meaningful dent it percentage terms requires a large growth lever, and streaming could be just the answer to the riddle.
What Does It All Mean For Netflix?
Alphabet’s new service is not designed to take on Netflix or Disney head-on. Indeed YouTube’s channel store won’t move the needle much for them. But it could help their competitors. Services like Paramount+, Peacock, and AMC Networks have a fraction of the subscriber base and could seriously benefit from YouTube’s vast reach that encompasses billions of eyeballs. The bottom line is Disney and Netflix may see their smaller rivals grow more rapidly as a result of Alphabet’s initiative.
Time to Buy Alphabet?
Based on our analysis of cash flows, Alphabet already had upside of 31.3% to fair value of $153.87 per share. But that didn’t factor in rising revenues from YouTube as a result of this new launch.
The bottom line is you were looking for a rock solid FAANG stock that was undervalued, you might have an even better bargain on your hands today than you first thought.