Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) may be an innovative tech giant, but in many ways, GOOG stock is all about web-based ads.
In fiscal 2015, 90% of Alphabet’s top line came from its Google ad biz — $67.4 billion of $75 billion in revenue, to be precise. That’s down as a percentage from previous years, and GOOGL did restructure in 2015 to demand more accountability from its non-Google divisions. But investors need to be honest about what’s driving GOOG stock right now.
However, you can’t really talk about companies like Google or Apple Inc. (NASDAQ:AAPL) or Amazon.com (NASDAQ:AMZN) or the like with only a short-term perspective. Part of the genius of these tech giants is that they always have something new in the pipeline worth considering.
And of all the innovation going on at Alphabet right now, perhaps the most interesting is YouTube Red.
This streaming video platform could very well put Netflix, Inc. (NASDAQ:NFLX) in a world of pain — and deliver big gains for Google stock holders.
GOOGL Stock Hopes YouTube Red Is a Killer App
Streaming video has been a big part of Alphabet since the 2006 acquisition of YouTube in an all-stock deal priced at around $1.65 billion.
But recent strides have moved YouTube far beyond the ad-supported LOLcat videos that made the platform famous. That began with the launch of YouTube Red in late 2015. YouTube Red offered an ad-free experience as well as some original programming for $9.99 a month.
Folks were skeptical, because given the choice between “free content” with annoying ads and opening up their wallet, most just suffer through (and ignore) the ads. However, YouTube wasn’t done. It added features that included offline viewing, integration with parental controls via YouTube Kids and bundling with Google Play Music to stream ad-free tunes.
The features seem to be a hit, given its 3% share in the “Pay TV” market according to research firm Digitalsmiths. That tops efforts such as the Sling TV effort from Dish Network Corp (NASDAQ:DISH).
Netflix, Amazon Instant Video and Hulu remain at the front of the pack. However, the relatively quick adoption of YouTube given its late entry into the marketplace is certainly noteworthy — particularly as the streaming market seems to be maturing and growth will be harder to come by.
YouTube Has Things Figured Out
Now, I’m not saying YouTube will suck up all those Netflix viewers. But as a parent, I can say firsthand that the majority of my household’s NFLX activity is for my kids since a lot of the programming on Netflix is stale. We do YouTube a bit, but the reason we don’t do it as often is because some less-than-desirable programming would find its way into searches and because the ads can be invasive or annoying.
We also do Amazon, mainly because I can download Instant Video titles to a Kindle and take it with us on six-hour car rides to Ohio — something no other platform had previously offered in as convenient or cost-effective a way.
YouTube seems to have figured all this out, however, with the ability to download shows without fear of content and programming on the go both being massive pluses.
This thinking shows GOOGL stock execs see the writing on the wall in the lucrative segment of children’s programming. And it’s encouraging to have this kind of innovation right out of the gate.
That should give Netflix pause — particularly as its user growth seems to be stagnating and competition will increasingly be taking a toll.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP.
