Google has never revealed YouTube's revenues - but one analyst who thinks that's about to change says it's a $15 billion business
- R.W. Baird analyst Colin Sebastian predicted that YouTube would generate $15 billion in advertising revenue in 2018.
- Sebastian said that YouTube parent company Alphabet is likely to start breaking out YouTube's finances
- Amazon became a lot more appealing to investors when it started breaking out finances of Amazon Web Services.
Alphabet, the umbrella company for Google and YouTube, has never revealed how much money it makes from YouTube. This seems crazy, given that YouTube by itself is probably at least as valuable as Netflix.
It also doesn't formally disclose how much it makes from its growing cloud services arm, Google Cloud.
R.W. Baird analyst Colin Sebastian thinks keeping these two fast-growth businesses quiet means Alphabet is undervalued as a company. In a session with reporters on Thursday, he predicted YouTube would pull in $15 billion (£10.7 billion) in advertising revenue in 2018. For comparison, Netflix made $11.6 billion (£8.4 billion) in revenue in 2017.
Sebastian said Alphabet's lack of transparency around YouTube and Google Cloud might be hurting its overall valuation, but that it won't be keeping its powder dry for much longer, at least on YouTube.
"Our view is that Google will provide a Youtube number, if not this year, then likely next year," he said.
To understand why, he pointed to something Amazon did back in 2015, and said Google might be looking for its "Amazon Web Services" moment.
Amazon looked like it had no profits for a long time
We know that Amazon hasn't historically made a lot of profit from its main business of selling stuff to consumers.
But the firm has started to make more money in businesses outside its core area of retail. One example is Amazon Web Services, the cloud infrastructure technology which underpins not only Amazon but most of the internet.
It's a high margin business and it's a huge profit driver for Amazon. It actually props up the rest of the company, and means the company has been profitable for several consecutive quarters. This is a novelty for investors, who are used to Amazon's thin retail margins and low profitability.
Even though it appeared to be making a lot of money from AWS, Amazon chose not to disclose its cloud revenues for years. Sebastian was one of the most prominent analyst voices suggesting back in 2013 that Amazon had a cloud gorilla on its hands, estimating that the cloud business was making $1.5 billion (£1 billion) a year.
When Amazon finally did decide to disclose AWS revenues in 2015, the stock popped.
Google might be looking for a similar pop, said Sebastian.
Here's what he said, emphasis ours:
"If you recall when Amazon disclosed its AWS numbers, the stock ripped in part because you could actually assign a value to that business. Our view is that Google will provide a Youtube number, if not this year, then likely next year. Maybe they will be required to by disclosure rules - but they may want that AWS moment in which the market can assign a ... multiple to YouTube. YouTube is probably a $15 billion business, and yet they don't disclose that number."
To be clear, Sebastian wasn't comparing YouTube to AWS in terms of value. It's more that Wall Street forgets Alphabet is sitting on a video giant.
Google Cloud is another monster business in the works
While Google doesn't break out how much it earns from Google Cloud, chief executive Sundar Pichai told investors that it brought $1 billion (£708 million) per-quarter. Simple maths suggests that means $4 billion (£2.8 billion) in annual revenue.
For Sebastian, that's another reason to be positive about Alphabet's valuation.
Google Cloud is a major rival to the jewel in Amazon's crown, AWS, and will probably experience similar growth, according to Sebastian. That's good news for Alphabet bulls, especially when Google starts breaking out cloud revenue.
"Will it take Google the 12 years it took Amazon?" said Sebastian. "No, Google will probably have a $20 billion cloud business in five years. And from an Amazon perspective, probably $150 billion of its market cap is probably AWS. [Cloud] is not recognised within Alphabet's valuation - I think transparency will go a long way."