In general, analysts like the deal, though Google did not give the Street a lot to work with in terms of hard numbers; they did disclose on the conference call that the deal would slightly dilutive to earnings. Some observers were a little concerned about how much Google is paying; others would have preferred they pay cash, rather than stock. Here’s a rundown of some of this morning’s comments from the Street:
- Mary Meeker, Morgan Stanley: $1.65 billion is a lot to pay for a startup with negligible revenue, however…as we were/are positive about eBay’s (EBAY) Skype acquisition, we are positive about YouTube (which, based on deal terms, should dilutive by 1-2% for Q4)…We like big bets that are strategically sound, especially when the majority of short-term number crunchers think the bets are crazy. Google has been analyzing its search queries for years and building its base of servers - we buy Google’s view that we are entering an ‘Internet video revolution’ - and with Monday’s announcements, Google just improved its weak position in the social networking area.
- Imran Khan, J.P.Morgan: While the recent content deals allay many of our concerns about copyright issues, we believe Google’s deeper pockets may attract some legal challenges. At the same time, we believe these considerations are much more capable of generating headlines than making any actual dent in Google’s botton line. Khan estimates YouTube can generate $13.5 million in revenue in fiscal 2006, and $145 million in ‘07.
- Mark Mahaney, Citigroup: Given the $10 billion in cash on Google’s balance sheet, we believe this deal structure is a material negative. Google’s explanation was that an all-stock deal was highly advantageous to YouTube shareholders from a tax avoidance perspective…this is a radical departure from Google’s M&A strategy which…has been almost exclusively to do tuck-in technology deals….the $1.65 billion amount would be almost equal to Google’s entire M&A spend to date…All that said, this deal does better position [Google] in one of…the key Internet growth areas…user generated content…The display advertising revenue potential implies $200 million-plus in ‘07 revenue and a relatively attractive 15x ‘07 EBITDA multiple.
- Robert Peck, Bear Stearns: After trying to compete with YouTube, Google has finally decided it was more prudent to buy them, vs. build a viable competitor. We think this is noteworthy, particularly for Google, as one of the major pitfalls of established incumbents is arrogance that the new player won’t succeed…This solves two problems for Google: lacking dominance in what is expected to be the fastest growing and most dynamic area of the Internet (i.e., video/multimedia) and lacking a robust social network…We think the price offered by Google may attest to the traction it is seeing from its MySpace relationship and the monetization upside.
- Mark May, Needham: The real loser in this may be Yahoo (YHOO), which has lost another key deal to Google and can now be considered a laggard in the online video category…We like the fundamentals of this combination, and believe YouTube’s growth over the next 12-18 months will show that the valuation is within reason.
- Denise Garcia, W.R. Hambrecht: We believe that by allowing YouTube to operate independently, Google is demonstrating its understanding of community-building sites and this acquisition may serve as a model for community-related acquisitions in the future. We beleive this is the most appropriate course of action to follow, given the strong affinity consumers have for the brand within community-based sites.
- Tim Boyd, Caris & Co.: Why is this important? Because video is one of the fastest-growing media formats on the Web and yet remains largely unmonetized. How can Google monetize YouTube? We see three primary methods: contextual search ads, branded/display ads and insertion of ads into videos on the site. A key question is whether or not Google will be able to achieve the last of these without drastically affecting the current “YouTube experience.”
Google shares today are up $3.94, at $432.94.