YouTube Could Be a $15 Billion Business This Year

Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL), the parent company of Google, owns a small video-streaming site known as YouTube. Alphabet's management loves to talk about YouTube, but it only occasionally provides any real details about the massiveness of the platform.

The best information we have right now is that YouTube has 1.5 billion monthly users, who stream an average of over 1 hour of video per day.

But the random tidbits Alphabet likes to provide about it never get to the heart of what investors really want to know: How much money is it making?

R.W. Baird analyst Colin Sebastian thinks YouTube could generate $15 billion this year, as reported by Business Insider. That would amount to well over 10% of Google's total advertising revenue. The thing is, that number might actually be conservative.

$15 billion is well within reason

With 1.5 billion monthly users, $15 billion in revenue would equate to just $10 per year in average revenue each. For reference, Facebook (NASDAQ: FB) reported an average revenue per user of almost $20 last year. Even Twitter (NYSE: TWTR) generated about $6.40 per user on its platform in 2017, when was it overhauling its advertising business.

Television broadcasters in America and Western Europe generate $0.23 (in total revenue) per person-hour of viewing. At a rate of an hour per day, that's about $84 per year. Is an hour of television really that much more valuable to advertisers than an hour of YouTube viewing?

YouTube has stronger engagement than either Facebook or Twitter. Facebook last reported its users spend an average of 50 minutes a day across Facebook, Instagram, and Messenger. Twitter doesn't say how much time its users spend on its app, but most analysts suspect that's because the figure would be embarrassingly low compared to the competition. TV still dominates our time, but consumers are watching less of it as they spend more time with alternatives including YouTube.

Considering Google's ad technology and targeting capabilities, it's entirely possibly that YouTube generates revenue somewhere between Twitter and Facebook on a per-user basis. In the long run, YouTube's monetization levels could even grow to levels comparable with television as it attracts more big advertising budgets from television and grows its subscription service.

Will Alphabet ever break out YouTube's financials?

Baird thinks it's only a matter of time before Alphabet reveals YouTube's financial results in order to give investors a clearer picture of its operations.

YouTube's growth has put downward pressure on Google's average ad pricing for several years now. "The decrease in cost-per-click was primarily driven by continued growth in YouTube engagement ads" has become a common refrain in every Alphabet earnings release. Last quarter, the average cost-per-click on Google properties declined 16% year over year.

Google bowed to pressure from investors two and a half years ago when it announced the restructuring that turned it into Alphabet, splitting out Google's operations off from its moonshots. With the size and impact of YouTube, Baird might be right to think Alphabet will split out YouTube. (He also thinks it will split out its cloud computing operations as well.)

Breaking out YouTube's results could be beneficial for Alphabet stockholders, as it would clarify just how valuable the property is. And if it's growing as quickly as analysts believe -- UBS's Eric Sheridan thinks it could generate $27 billion in annual revenue by 2020 -- it's worth quite a bit.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Alphabet (C shares) and Facebook. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Facebook, and Twitter. The Motley Fool has the following options: short March 2018 $200 calls on Facebook and long March 2018 $170 puts on Facebook. The Motley Fool has a disclosure policy.