All eyes may be on Google (NASDAQ:GOOG) Inc.'s YouTube these days, but bumper profits expected from Postini, Google's latest acquisition, could easily break the spell – at least amongst Google investors.
Postini is an online provider of email, web and other communications security products that Google agreed to buy in early July for US$625-million.
Once the deal closes – expected sometime before the end of September – it is anticipated that Postini will immediately be more profitable than YouTube has been to date, according to RBC Capital analyst Jordan Rohan. He said is a research note that Postini could add US$25-million to Google Inc.'s bottom line in the fourth quarter.
In comparison, Mr. Rohan estimated that YouTube, which Google purchased for US$1.65-billion last October, is currently generating US$4-million in net revenue per quarter.
"YouTube may be a valuable asset strategically, but its financial justification has not yet materialized," the analyst wrote.
The inherent business challenge for YouTube is that advertising revenue on many of the popular clips would require a significant license fee paid to the owner of the content.
That said, Mr. Rohan told clients that YouTube still provides significant psychological upside via its participatory ads and remains a key catalyst to Google's stock, which he added, still remains worthy of an "outperform" rating and US$560 price target.
"We believe the recent liquidity-driven market correction has created an attractive entry-point for investors," he said.
Our analysis indicates that valuation is approaching our "must-buy" range as long as the growth in Google earnings remains mostly uncorrelated with broader macro trends.
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