Google Inc (NASDAQ:GOOG) (NASDAQ:GOOGL) has been added by Jefferies to its franchise picks list. According to the investment research firm, the search engine giant was included in the list, in part due to its YouTube findings.
In a recent note to investors, Jefferies analyst Brian Pitz and his colleagues said, “We added Google to our franchise pick list as the digital video ecosystem continues to mature.”
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According to them, YouTube makes the search engine giant a top pick given the fact that it has the largest viewers by margin (1B+ people each month), the best ad tech-stack, improving content, ubiquity of service, and the skippable TrueView ad format.
Google best-positioned to benefit from online advertising
Pitz and his colleagues believed that YouTube, the video service of Google Inc (NASDAQ:GOOG) (NASDAQ:GOOGL) is best-positioned to benefit from strong go-forward growth in online video advertising.
Pitz and his fellow analysts emphasized that YouTube is the leading online video destination by far.They valued the video service at around $26 billion to $40 billion, which is 7% to 11% of the total market cap of Google Inc (NASDAQ:GOOG) (NASDAQ:GOOGL).
The analysts estimated that YouTube would generate $5.9 billion in gross revenues in 2014 and would grow to $9.8 billion in 2017.
The analysts noted that the online video advertising is growing two times as fast the overall advertising market. Pitz and his colleagues estimated that the online video ad will reach as much as $17 billion plus opportunity in the United States alone by 2017.
Pitz and his fellow analysts emphasized that online video advertising will be a major go-forward growth engine for well-positioned companies. Google Inc (NASDAQ:GOOG) (NASDAQ:GOOG) is undoubtedly one of the companies that will benefit from online ads since YouTube has more than one billion monthly active users spending over 6 billion hours watching videos per month. YouTube processes more than a billion video views per day.
Google Inc (NASDAQ:GOOG) (NASDAQ:GOOGL) acquired YouTube for $1.65 billion in 2006. According to the analysts, their current valuation of around $26 billion to $40 billion for YouTube is 16 to 24% times more than its acquisition price, or represents an annualized return of 48% to 58%.
YouTube growth drivers
Pitz and his colleagues identified some of the growth driver of YouTube including the dramatic improvement of the quality its online video content and the recently launched Google preferred, which reserves the top 5% of videos for big brands across 14 categories.
The new ad formats that offer measurable ROI for marketers, the convergence of TV and online video ad budgets and the new partnerships with Nielsen and comScore are also growth drivers for YouTube.