Google, YouTube and the Drag on Earnings

There’s an interesting article out this morning about the death of YouTube.  Granted, the article is penned by a competitor, so it’s always necessary to take such proclamations with a grain of salt.  However, the article elucidates some interesting data about the massive online video property.

Credit Suisse estimates that YouTube is losing $470 million a year for Google.  That’s a staggering number, and one that is only addressed in the article as the potential for YouTube as a going concern.  How long, the article asks, will Google front the cash to support this loss generator?

As a finance nerd, and GOOG shareholder, I like to think about things a little differently.  What is the implied impact of YouTube to Google shareholders?  Doing some simple math reveals the following:

P/E Multiple 27.86 x
Loss Per Year for YouTube $ (470,000,000)
Implied Market Cap Impact $ (13,094,200,000)
GOOG Market Cap $ 117,000,000,000
Price Per Share $ 370.00
Number of Shares 316,216,216
Price Impact of YouTube $ (41.41)

YouTube represents a 12% drag on share price.  Never mind the cash that was spent on the acquisition, but we’re talking about the here and now.  That’s a pretty astonishing number, and I am guessing that it’s not one that is a temporal blip, but more of a long term trend that could potentially take years to get to break even.

The theory has always been that Google will find a way to monetize the property.  However, having pulled out of newspaper print advertising, and pulled out of their radio advertising program, one should consider whether the maxim that Google can monetize anything other than search, specifically as it pertains to existing media channels (i.e. video).

As a shareholder, I can only wonder what is going on inside of Google with their acquisitions.  JotSpot, Dodgeball, and others, all seemed like promising properties before being purchased, and they have all have varying levels of success with some of them getting killed outright.  Purchasing threatening companies to kill them has long been a strategy of the savvy M&A strategist, but carrying a $1.5 billion purchase, and carrying a $470 million yearly loss (in perpetuity?), is not looking like a great strategy.  Hoping they can monetize YouTube brings to mind one of the best lessons I have learned from one of the best bosses I have ever had: “Hope is not a strategy.”