Here's How YouTube Could Add $10-$20 To Google's EPS By 2022

The shift from offline to online video consumption is proceeding at a brisker pacer, which should benefit Alphabet Inc GOOGL GOOG's YouTube platform, according to William Blair. 

The Analyst

William Blair analyst Ralph Schackart has an Outperform rating on the shares of Alphabet.

This should allay some investor concerns following multiple analyst downgrades of Alphabet after the company's Q4 print. 

The Thesis

YouTube is a Google property that can generate "material optionality" for Alphabet shares going forward, with the online video platform capable of increasing Alphabet's stock price by $134 by the end of 2018, Schackart said in a Wednesday note.

Apart from the shift to online video, the capability for "direct response"-like targeting that YouTube recently added is a "significant event" for advertisers, and potentially YouTube, the analyst said.

OTT become a "must buy" for digital video clients in 2018, Schackart said, citing a large pure digital agency. The analyst sees this as a positive catalyst for YouTube in 2018.

William Blair projects that YouTube revenues will grow at a nearly 30-percent rate over the next five years, well above the Street's consolidated Google ad revenue growth forecast — excluding traffic acquisition costs — of 13 percent. The firm's base-case earnings per share estimate for YouTube is $17 in 2022 versus $4 in 2017, representing 21 percent of the 2022 consensus estimate of $80 for Alphabet.

YouTube's contribution could rise to $20 in a bull-case scenario, the analyst said. 

Other businesses apart from YouTube could contribute an additional $100 to Alphabet's EPS, Schackart said. 

"We peg upside to Alphabet's shares of 20 percent over the next 12 months, with a bull case of 43 percent."

Applying a 30-times forward multiple to YouTube earnings suggests YouTube alone could be worth over $500 per share in 2021, or about $300 today if discounted back at 14 percent, according to William Blair. 

The Price Action

Alphabet shares are up about 32 percent over the past year.

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