Alphabet has been Needham’s top pick among large-cap stocks this year. In a Wednesday note, Martin estimates that a stand-alone valuation of YouTube would see the business worth more than 50% above the value it gets inside Alphabet. A partial spinoff of YouTube might therefore add another 8% to Alphabet’s current stock price of $190, and help it reach her price target of $210.

YouTube is but one of several reasons that Needham likes Alphabet. The company commands near 40% of digital ad spending, in a year when political ads abound. Artificial intelligence will power all winning digital businesses in the next few years, Martin believes, and that’s great for Google. Its AI cloud facilities and proprietary large-language models will benefit advertisers on Google search and YouTube platforms.

Video streaming has grabbed viewers from traditional television, and YouTube leads the market in streaming viewers. In 2023, Nielsen reported that YouTube had over 9% of streaming hours, compared with 8.5% for

Netflix

and about 3.5% each for Hulu and

Amazon.com
’s

Prime Video. At about $9.70 per thousand impressions, YouTube also commands a 30% to 50% higher price from advertisers than rivals such as

Meta Platforms

’ Facebook and Instagram, as well as Twitter or

Microsoft
’s

LinkedIn.

Total ad revenue from YouTube came to $31.5 billion in 2023, or about 10% of Alphabet’s total. Martin estimates YouTube ad sales will grow to $35 billion in 2024.

Another $20 billion of YouTube’s revenue this year will come from its fast-growing video-subscription businesses. One piece of the company’s subscription business is YouTube TV, whose eight million subscribers make it the country’s largest virtual cable bundler. With draws such as the NFL Sunday Ticket—which includes every pro football game played on Sunday—YouTube TV subscription revenue will grow 25% this year, to $4.8 billion.

Another $8.4 billion will come from YouTube Premium, an ad-free service with extra content and mobile access, that’s growing by a third from its 2023 level. Then there’s YouTube Music, a competitor to

Spotify Technology

that should grow by a third this year, to $6.6 billion.

To value YouTube’s $20 billion in subscription revenue this year, Martin uses the 8.8 multiple of enterprise value to subscription revenue that the market awards Netflix. That results in about a $175 billion value for the subscription businesses.

To value YouTube’s $35.5 billion in 2024 advertising revenue, Martin starts with a 10-times multiple of revenue that she derives from averaging other digital ad-driven businesses like

Trade Desk

and

Reddit
.

That gets to a value or $355 billion. Cross-checking that number with estimates that compare YouTube’s user count and its daily minutes-of-engagement versus rivals such as Meta and

Pinterest
,

Martin says the ad revenue could command a value as high as $445 billion, or even $625 billion.

Averaging her values for YouTube’s ad business, and adding $175 billion for the subscription units, the Needham analyst arrives at a stand-alone value for YouTube of some $535 billion.

But Alphabet’s current enterprise multiple of 6.3-times revenue would value YouTube at only about $350 billion, or $190 billion less.

So if YouTube were spun off, even partially, by the choice of Alphabet’s board or the mandate of regulators, Needham estimates that about $190 billion in trapped value would be added to Alphabet—or some $15 a share.

Write to Bill Alpert at [email protected]