360 Degrees of Google

James Altucher, Jim Cramer and Dan Fitzpatrick examine its deal to buy YouTube.
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Editor's Note: In this edition of "360 Degrees,"

RealMoney

commentators evaluate

Google's

(GOOG) - Get Report

acquisition of YouTube. What does it mean for the company and the stock?

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YouTube's No Dot-Com-Craze Dumper, by Jim Cramer

Originally published on

RealMoney

on Oct. 10 at 9:50 a.m. EDT

Shades of another era. Just like the dot-com craze. No different from the nuttiness of 1999-2000.

I wish I could agree. I wish I could write off this YouTube as a one-off situation. But I can't. I can't because the big difference between this time around and last time is one simple word: Profits.

All the dot-com outfits people brought public and combined with in the 1998-2000 period shared one thing: Giant losses. They gave away stock because the stock was overvalued, given the short-term performance of the entities that paid for these properties.

Google, on the other hand, is immensely profitable. It is beyond-belief profitable vs. the entire dot-com world. I remember when Henry Blodget, late of the Internet analyst community, said that there would be only a few winners in the dot-com world, so you needed to buy a basket of properties; that way, if you hit one or two of them, it all worked.

I wish that were the case. The big moves in

Yahoo!

(YHOO)

and

eBay

(EBAY) - Get Report

and

Amazon

(AMZN) - Get Report

ended so long ago, it's hard to remember them as growth entities.

IAC/InterActiveCorp

(IACI)

is coming back ever so slowly. None of those companies has spectacular growth anymore in revenue or profit.

Meanwhile, old media totally muffed it, thinking only about how to pimp the stock market in equity offerings, ones that didn't get done. And nobody else stepped up to the plate.

Except for Google. It would have been "more right" if Blodget had said there would be only one winner, but that seemed absurd at the time. I now regard it as true. Which is why it can buy YouTube for so much "money," or wampum as I am sure you will hear, and nobody sells the stock down.

To me, it is obvious that YouTube easily could be monetized in the Google system, something that no other entity, save Yahoo!, could possibly say.

Microsoft

(MSFT) - Get Report

can't say it, because its online efforts still lack vigor.

Time Warner's

(TWX)

AOL? Have you gone to its site lately? It looks like it's stuck in 1999. IAC? That's a service site.

News Corp.'s

(NWS) - Get Report

already got one and

CBS

(CBS) - Get Report

is rightly focused on developing

CSI's

and more

CSI's

, which are incredibly profitable in their own right.

Still, the temptation is to say, "Isn't this the same as Yahoo! buying Geocities, a totally overhyped company that Yahoo! could afford to pay too much for because who cared?"

No, because Geocities was "subtractive." This acquisition, I believe, will prove to be additive next year.

No one talked profits in 1999. It was all eyeballs and clickthroughs. Now everything is measured by CPMs (an estimate of the cost per thousand views of an ad), which is apples-to-apples to the rest of the media, and that means Google's got it made because it just bought itself some high-CPM copy to go around its burgeoning ad business.

Earlier in the day, Cramer wrote:

If I am right about

Google

(GOOG) - Get Report

, you might want to pick up some December $500 calls for $6-and-change today. I know, that's a wild one, but Google could become the de facto "only tech or media stock you need" between now and the end of the year, and it won't take much to have the stock trade to 41 times next year's $12 potential in earnings.

This stock is 40 points away from its all-time high, and there seems to be a real possibility that Google will take out that high in the coming weeks. If so, these December $500s at $6 could be a double.

Normally I like to recommend deep-in-the-money calls for what I like very much, and I am not changing my stripes. They are the best plays on GOOG. The December $400s at $40-and-change would be the best place to be.

But I believe that it could very well be right to have something up top, so to speak, for the breakout (if it comes), because that contract could turn into money without all that much of a move.

Remember, divide the stock price by 10 with Google to get it in perspective. Is it possible that a $43 stock could go to $50 in three months?

I sure as heck think so.

CBS owns CBS Radio, which broadcasts Real Money Radio With Jim Cramer, on select CBS owned and operated radio stations. At the time of publication, Cramer was long Yahoo! and News Corp.

Wait to Buy It Cheaper, by Dan Fitzpatrick

For any analysis of Google to be of value, it has to reference time frame. This anaconda has uptrends within downtrends that are within uptrends. I recently wrote about Google within a

multimonth time frame. If you missed it, you might want to have a look because that thesis still stands.

However, let's look at Google within a short-term time frame -- a few days to a week or two. With earnings just a little more than a week away, the dynamics of this stock will change constantly.

This is a daily chart, but we can see that today's price action has been dominated by the sellers, and if it's true that mornings are dominated by retail activity and the afternoons are dominated by the institutional desks, then we've got to respect today's reversal. At midday, trading volume was already higher than the average daily volume. This sets Google up for a blow-off top, where the last gasp of buying occurs in response to positive news. And once all the demand for the stock at these high levels has been satisfied, sellers need to cut their price to sell their stock. Simply put, I think that's what's happening now -- the Greater Fool has already bought and is now a seller.

I'd be patient with Google. As you'll see in my earlier piece, Google appears to be starting a significant move higher, however, I think you'll be able to get it for cheaper soon. After all, with the momentum-oriented crowd already in the stock, who is left to do some anticipatory pre-earnings buying?

Google Still Gets It, by Cody Willard

Originally published on

RealMoney

on Oct. 9 at 10:33 a.m. EDT

As I wrote more than a year ago in a post titled "

Google Gets It," I've owned

Google

(GOOG) - Get Report

since the day it came public. I plan to own it for a very long time indeed, in large part because the company understands that distribution is the key to the content revolution.

Google doesn't want to waste time, money or energy on

owning

content and especially not on

creating

content. No, Google understands that because all of us can now create and publish content of any sort, from the written word (blogs) to audio words (podcasts) to video (YouTube) -- it doesn't want to compete with all of that exploding competition.

The money is in organizing and distributing that content in a simple, straightforward and respectable manner. As billions of people on this planet come online and look to consume that content, Google's positioned itself to be an agnostic distributor. Acquiring YouTube makes tons of sense.

After the deal was announced, Willard wrote:

I expect that partly because of this smart acquisition, Google will be closer to whatever its 52-week high is this time next year.

At the time of publication, the firm in which Willard is a partner was net long Google, although positions can change at any time and without notice.

Three Ways of Valuing the YouTube Deal, by James Altucher

Originally published on

RealMoney

on Oct. 10 at 2:29 p.m. EDT

A lot of good articles and analyses of the YouTube-Google deal have already been done -- many on this site and others that I've mentioned in my Blog Watch columns on

Friday,

Monday and

today (and will undoubtedly mention tomorrow, too). So while I'm reluctant to write yet another, some interesting things are still left to look at.

It's important to view almost all of the articles out there with a good filter. How come? For one thing, everyone is jealous. Maybe I'm weaker than most, but I know that I am. Chad Hurley is a 29-year-old Web designer who could be working on Web sites for $15 an hour. Instead, he started YouTube 1 1/2 years ago and is now worth about $200 million in Google stock. That means at some point in the next five to 15 years, he'll be worth $1 billion if he never sells his Google stock. Meanwhile, he dances to work every day because he probably has the best job in the world. Congrats, good luck and I'm still jealous.

A lot of people out there are arguing about the valuation of the deal, taking sides on whether it's overvalued or undervalued and citing various metrics. Here are a few ways to look at valuation:

1. Value Per YouTube User

Let's assume YouTube is a mature business and that its user base is set and will not grow considerably in the future. It had 50 million unique visitors in September, so let's say that continues.

Assume also that a decent CPM, or cost per thousand impressions, is $10 for YouTube, and that it can put two ads per page (or per roll). This, by the way, is a fairly low assumption. It can probably get more than $10 CPM and can probably put three or more ads per page.

With these assumptions, that's $20 per thousand impressions. My guess is that each user hits an average of five to 10 pages a visit. How do I arrive at that guess? I've had the opportunity to study traffic records on other video-aggregation sites, and this seems to be the average across them. YouTube, being the stickiest video site out there (in part because people store family videos on the site), is probably more toward 10 pages per visit, but let's take the conservative side and say five pages per visit.

That gives us 50 million unique visitors multiplied by five pages per visit times $20 CPM divided by 1,000, equaling $5 million a month, or $60 million a year.

What's the EBITDA margin on that? It's pretty high, considering that right now it gets to leverage off Google's substantial infrastructure for delivering video. Users generate all the YouTube content for free, and Google is giving it infrastructure now. I'm not sure what its other costs are. (Mark Cuban would say "legal costs," but I'll deal with that in a second.) So let's say YouTube makes $50 million a year. Google's current multiple is 63 on earnings, but let's discount that by half and you still end up with around $1.6 billion in value.

Let's review the assumptions again:

  • $10 CPM;
  • two ads per page;
  • zero growth;
  • high margins;
  • five pages per visit.

Some of these assumptions might be high, but I don't think so. If anything, my assumptions are low, particularly when you leverage Google's other assets:

  • Pre-existing infrastructure for delivering video: Google is already in this business. It is already set up to deliver hundreds of millions of videos a month, if need be. The addition of YouTube to that infrastructure probably only increases the cost incrementally.
  • Pre-existing legal strategy: Again, Google is already in this business. It already has relationships and discussions with all of the entertainment companies over copyright issues. And, while entertainment companies might not have a problem bullying YouTube, people are a little more hesitant to mess around with the driver of all of their sites' traffic. YouTube's addition to Google probably won't drastically increase the already ongoing legal discussions that Google is having with entertainment companies.

Let's look at the next way to value YouTube , which is an important assumption I left out of the above.

2. Value Per Google User

According to various traffic-analysis sites such as Hitwise and Compete, the average YouTube user is "stickier" than the average Google Video user. In other words, people come back to the YouTube site, spend more time on it and sign up and start accounts there. Moving Google Video users over to the YouTube platform will ultimately create more page views (and more ad dollars) from pre-existing Google users.

Too many assumptions must be made to determine what this is "worth," but suffice it to say that Google, with an 11% share of the video market, is definitely focused on ways to increase value per user.

3. Demographics

The aforementioned zero-growth assumption is a bit naive. Maybe YouTube will lose market share, which now stands at 46% of the online video market. However, that's a breakeven proposition at best, considering it has made all the right moves, to date, to increase its market share on an almost daily basis.

But demographics provide a good cushion. Right now, according to eMarketer:

  • Online video advertising has increased 71% year over year this past year.
  • Online video advertising now makes up only 2.3% of the $16 billion spent annually on online advertising, or about $370 million. By 2010, eMarketer is predicting that online video advertising will make up 8% of the $30 billion spent on online advertising, or about $2.4 billion. If YouTube's market share of that advertising is similar to its market share of online video downloads, then that would amount to about $1.1 billion in ad revenue.

Regardless of how you look at it -- per YouTube user, per value added to Google user or just demographically -- the YouTube acquisition makes sense for Google, just like it would have made sense for any of the other major players.

I'm not sure you can make the same conflation for Facebook, except maybe in the case of

News Corp.

(NWS) - Get Report

/MySpace. That said, Facebook is now the last remaining private mega-social network. Meanwhile, there are other publicly traded social networks that aren't fetching anywhere near the value per user being accorded to YouTube, but I think that will change over the next year.

Google Gets YouTube -- for Free! By Barry Ritholtz

Adapted from a post in

Columnist Conversation

on Oct. 9 at 5:55 p.m. EDT

Note that this was an all-stock deal worth about $1.65 billion. Rumored since last week, the news drove Google's stock up $8.50 today, following Friday's nice point gain. Given Google's 215 million share float, this acquisition was essentially free. The deal instantly catapults Google to the top of the pile in the fast growing world of online video. And if anyone can figure out how to monetize serving ads to YouTube's users, it's Google.

James Altucher is a managing partner at Formula Capital, an alternative asset management firm that runs several quantitative-based hedge funds as well as a fund of hedge funds. He is also the author of

Trade Like a Hedge Fund

and

Trade Like Warren Buffett.

Jim Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO.

Fitzpatrick is a freelance writer and trading consultant who trades for his own account in Encinitas, Calif. He is a former co-manager of a hedge fund and teaches seminars on technical analysis, options trading and asset-protection strategies for traders and business owners.

Cody Willard is a partner in a buy-side firm and a contributor to TheStreet.com's RealMoney.

Barry Ritholtz is the chief market strategist for Ritholtz Research, an independent institutional research firm, specializing in the analysis of macroeconomic trends and the capital markets.