Tech giant Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) turned heads earlier this month when the company announced its highly anticipated cloud-gaming platform, called Google Stadia. The launch was light on details, but in short, Google Stadia is a platform which allows gamers to stream video games from Alphabet’s massive global network of data centers to any internet-connected device in the world.
No consoles or physical hardware will be required, outside of a controller. Think Netflix (NASDAQ:NFLX) for the video-game world.
Insiders have labeled this video-game-streaming market, “cloud gaming.” Inevitably, cloud gaming will follow in the footsteps of the streaming-internet-TV market and one day turn into a really big global market.
How big? I think the total addressable market for cloud gaming measures somewhere north of $600 billion.
But as with any total addressable market figure, I don’t think the market will ever realistically get that big. Still, since there are 2.3 billion active gamers in the world, I think that the cloud gaming market will eventually be a $360 billion market.
Right now, given Google’s infrastructure, brand name, and financial resources, Google Stadia is positioned to be the Netflix of this industry. Netflix controls about half the global-internet-TV market. Thus, if Google Stadia can become the Netflix of cloud gaming, the business could one day generate annual revenue of nearly $200 billion.
That’s a big deal for GOOGL stock. Alphabet is set to generate less than $200 billion of total revenue this year. As a result, Google Stadia could more than double Alphabet’s revenue in the long run. Presumably, that means it could tremendously lift GOOGL stock in the long run, too.
So Google Stadia – while still relatively new – is yet another reason to be bullish on GOOGL stock in the long-run.
Cloud Gaming Is the Future
Many compare cloud gaming to the streaming-internet-TV market. This comparison is quite accurate. Both cloud gaming and internet streaming video improve traditional on-premise solutions by removing the hardware, increasing convenience, and providing the benefits of a subscription model (consumers love subscriptions).
The-streaming-internet-TV market has already entirely disrupted the traditional video market. The cloud-gaming market will do the same to the traditional video-game market. As a result, within the next several years, it seems likely that all videos will be watched and all video games will be played using cloud-hosted solutions.
But this comparison ignores one important point: consumers can get by just fine without a streaming-internet-video subscription. Although streaming-internet video almost entirely wiped out DVDs, the traditional video content world is much bigger than DVDs.
Traditional TV packages have hundreds of channels that allow consumers to watch TV shows, live sports, and news, and purchase movies. There are also movie theaters, which allow consumers to watch every big hit coming out of Hollywood.
The video-game world doesn’t have comparable outlets . Games are sold directly by publishers to consumers. Those games are played on a console. There’s no equivalent to movie theaters in the video-game world.
Internet-streaming video killed the DVD business rather quickly. Cloud gaming will kill the hardware-video-game business rather quickly, too. And, because there’s no other outlets in the video-game world, the killing of traditional video-game hardware will rapidly and directly translate into the growth of cloud gaming.
As a result, I think the cloud-gaming industry can get very big, very fast.
A $200 Billion Opportunity for GOOGL Stock
Realistically, I believe the leader of the cloud-gaming sector will one day generate nearly $200 billion of annual revenue from that business.
According to Newzoo, there are 2.3 billion active video-game players in the world. That number is rapidly growing. Within the next decade, it will easily hit and very likely surpass 2.5 billion.
Internet-streaming-video solutions cost around $10 per month. New video games usually cost about two to three times as much as new DVDs. Consequently, cloud-gaming services should be more expensive than internet-streaming-video. Let’s say $20 per month. Monthly revenue of $20 from 2.5 billion gamers equates to a total-addressable market for cloud gaming of $600 billion.
I’m not sure the market will ever get that big. Getting 2.5 billion people around the world to pay $20 per month is a tall order. Some would say that’s impossible. I’d be inclined to agree.
But 1.1 billion gamers are spending money on in-game purchases, and those are the gamers who would likely pay $20 per month for cloud gaming because they are already spending big money on games. The number of such gamers is rapidly growing. Within the next decade, it will likely hit 1.5 billion. At $20 per month, that suggests a realistic addressable market for cloud gaming of $360 billion.
Right now, Netflix has roughly 140 million subscribers in a world in which 250 million households stream video over the internet. So NFLX has over 50% of the global-internet=streaming-video market. Realistically, then, the leader of cloud gaming with Netflix’s level of market share would control roughly 50% of the market. That means the cloud-gaming leader could one day have an opportunity to generate nearly $200 billion of annual revenue.
Will that leader be Google Stadia? It’s too early to tell. But Alphabet does have the data-center infrastructure, brand-name, and financial resources to make Google Stadia a leader in the cloud gaming market. So Google Stadia does have a realistic opportunity to be a hundred-billion-dollar business one day, boosting Alphabet stock in the process.
The Bottom Line on GOOG Stock
Alongside continued robust ad revenue growth, a red-hot cloud business, and a potentially enormous self-driving business, Google Stadia is yet another reason to buy and hold GOOGL stock for the long-haul.
As of this writing, Luke Lango was long GOOG and NFLX.
