Why YouTube Is Focused On Music Streaming

Alphabet Inc GOOGL GOOG's push into the streaming music space with the announcement of a revamped YouTube Music offering could result in a notable uptick in user monetization, according to Morgan Stanley.

The Analyst

Morgan Stanley's Brian Nowak maintains an Overweight rating on Alphabet's stock with an unchanged $1,200 price target.

The Thesis

Alphabet's YouTube unit announced Thursday it will offer a free, ad-supported version of YouTube music or an ad-free $10 monthly subscription. 

Nowak named three reasons why a streaming music focus is attractive for YouTube:

• Music is a large and growing market that can reach 15 percent of global smartphone users by 2022 versus 6 percent in 2017.
• YouTube already boasts a large 1.8-billion global monthly active user base, with music being the most common use case.
• If successful, YouTube Music can "move the needle" on YouTube monetization.

The math behind YouTube's ambitions in music "isn't perfect" but is nevertheless "bullish" for the stock, the analyst said.

Every 1 million non-paying YouTube users that convert to a paid YouTube music subscription will add an incremental 1 percent to YouTube revenue. Assuming YouTube Music reaches a 25-million user base by 2022, music will generate $3 billion in new revenue, Nowak said — assuming users in developed markets are monetized at a higher rate than emerging countries.

The push into streaming music "matters" for Alphabet as an entity, as Morgan Stanley values the stock on a sum-of-the-parts method based on an implied revenue multiple, Nowak said. As it stands now, YouTube's $160-billion valuation is based on an implied 7x multiple and the prospect for "material incremental monetization" naturally makes the case for a higher valuation over time, he said. 

Related Link: Where Can You Stream Music For Less Than $10 A Month?

What About Spotify?

Rival streaming music provider Spotify Technology SA SPOT is the market leader, Nowak said. But Spotify's lead may have come due to Apple Inc. AAPL pushing its Apple Music platform to its own user base at the expense of the larger Android global community, the analyst said. 

Google Play music has been in the market for years, and while it would be a mistake to not take YouTube "seriously" today, only "time will tell" if its ambitions is aimed at building a new business line or merely appeasing the music industry after years of public battles, the analyst said. 

Price Action

Alphabet shares were trading lower by 1.4 percent at the time of publication Friday, while Spotify shares were down 1.95 percent. 

Related Link:

Cramer: Investors Made 'Particularly Egregious Error' In Selling Spotify