[Editor’s note: This article was originally published in January 2018. It has since been updated to include the most relevant information.]
Since mid-February, the stock market has fallen off a cliff thanks to the rapidly spreading novel coronavirus, an all-out oil price war, and general concerns about the strength of the global economy to withstand these shocks. In less than a month, the S&P 500 has shed 13%, with many of the market’s best stocks — like Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) — dropping much more (GOOG stock is down 20% since mid-February).
But, let’s take a step back. Over the past five years, GOOG stock has risen about 120%, because the company has capitalized on big growth trends like digital advertising and cloud computing. During those five years, there have been plenty of market risks, such as oil prices dropping to decade lows in 2015, and escalating trade tensions between the U.S.-China driving stocks into a bear market in late 2018.
None of these risks derailed Alphabet’s growth narrative, ultimately because the growth drivers in digital advertising and cloud computing have been more robust and enduring than the market’s headwinds.
The same will be true going forward. But, going forward, it won’t just be digital advertising and cloud computing carrying the torch for Alphabet. Instead, the company will add multiple new growth drivers to its pipeline.
One of those big growth drivers is YouTube TV.
Right now, hardly anyone is talking about YouTube TV. Come 2025, though, everyone will be talking about it. This transition from “no one” to “everyone” should ultimately help spark continued big gains in GOOG stock.
Sports Is Stunting the Streaming Revolution
There’s no hiding it. Cord-cutting is happening everywhere. It started a few years back. It’s still accelerating today, and that’s because the value proposition of traditional cable packages simply doesn’t compare to the value prop of OTT entertainment services like Netflix, Inc. (NASAQ:NFLX).
When it comes to cable, you get a bunch of live TV channels — which you can only watch at pre-programmed times and through a cable-box-connected TV — for about $100 per month. When it comes to Netflix, you get a seemingly unlimited portfolio of video content — which you can watch whenever you want, wherever you want — for $13 per month.
It just doesn’t make sense to have cable… unless you really value live sports and live news, because most streaming service platforms like Netflix and Disney+ don’t have live sports or news.
As it turns out, the majority of Americans do value live sports and live news. Roughly 60% of Americans are sports fans, and the list of most watched television broadcasts in US history is dominated by sporting events (specifically, the Super Bowl). Moreover, television is still the most common news source for Americans. Roughly 50% of Americans get their news from television.
Given those stats, it should be no surprise that about 75% of households in the U.S. still subscribe to cable television, despite its huge cost and convenience shortcomings. For the time being, sports and news are keeping cable TV alive, and stunting the streaming revolution.
YouTube TV Will Be Huge
The sports and live news moat keeping cable TV alive, is rapidly being eroded by Alphabet’s relatively new streaming service, YouTube TV.
In early 2017, Alphabet launched YouTube TV. YouTube TV is essentially Google’s attempt to create a robust live-streaming TV offering tailored to the world of internet TV. You pay a set monthly bill ($50) for access to 70-plus live-streaming channels (including all the big ones, like ABC, CBS, NBC, FOX, ESPN, and FX). You also get unlimited cloud DVR space, 6 accounts per household, and can watch from a phone, tablet, TV, or computer.
In other words, it’s Netflix for live TV.
And just like Netflix has taken off over the past several years, YouTube TV will take off over the next several years.
YouTube TV already has 2 million subscribers. That is just the tip of the iceberg. About 86.5 million U.S. households still pay around $100 per month for cable TV, even in the world of Netflix, Hulu, and Amazon Video. They do it because they want access to live sports and live news.
But, with YouTube TV offering all those things for just $50 per month (versus cable at $100 per month), we will see a huge shift of those 86.5 million households from cable packages to “streaming live TV” over the next several years. By 2030, it’s fairly likely that cable TV is largely extinct, and that streaming live TV platforms amass, in aggregate, about 85 million subs.
Will YouTube TV get all of those subs? No. There are competitors in this space. Of course, if you’re a sports fan, you’ve seen the “Hulu has Live Sports” ads. AT&T (NYSE:T) also has a similar offering in this space. As do many other players.
But, given YouTube’s huge reach, strong brand equity in the streaming video space, and Alphabet’s enormous research and marketing budget, it’s quite likely that YouTube TV does emerge as one of the top players in this “streaming live TV” market.
The Numbers Could Get Very Big
For modeling purposes, let’s sketch out what YouTube TV could like by 2025.
Current projections estimate that about 14 million U.S. households will cut the cord by 2023. I think that’s light. Given the huge push from media companies into this space — Disney (NYSE:DIS) just launched Disney+, Apple (NASDAQ:AAPL) just launched AppleTV+, Comcast (NASDAQ:CMCSA) is set to launch Peacock, so on and so forth — I believe that the cord-cutting trend will accelerate in coming years.
In 2019, about 4 million U.S. households cut the cord. From 2020 through 2025, I think that number will average around 5 million households per year. Assuming so, at the midpoint, you are talking about 30 million cord cutters by 2025.
Of those 30 million, let’s say about half end up migrating to YouTube TV. That’s 15 million new subs, on top of the 2 million the platform already has, for a total of 17 million subs by 2025.
At $50 per month, that equates to over $10 billion in annual revenue. Even for Alphabet — $190 billion in revenues projected this year — that’s still substantial.
Bottom Line on GOOG Stock
YouTube TV’s impending, explosive growth is just one of many reasons to buy and hold GOOG stock for the long term. There is also the burgeoning cloud business, the still strong digital ad business, the potentially explosive self-driving business, the booming smart home business, and much, much more.
All together, there is no reason to sell GOOG stock here. Instead, buy shares on near-term market headwinds, and hold for long-term gains.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.