YouTube was launched on Feb. 14, 2005, as a site where users were to be able to post videos. Eighteen years later, YouTube is now one of the largest video platforms in the world and a major piece of growth and revenue for Alphabet Inc GOOGGOOGL. Here’s a look back at a key Google acquisition.
What Happened: On Oct. 9, 2006, Google announced it was paying $1.65 billion in a stock-for-stock deal to acquire video platform YouTube, now one of its biggest revenue drivers.
“The YouTube team has built an exciting and powerful media platform that complements Google’s mission to organize the world’s information and make it universally accessible and useful,” former Google CEO Eric Schmidt said at the time. “Together, we are natural partners to offer a compelling media entertainment service to users, content owners and advertisers.”
At the time of the acquisition, there were concerns that Google had overpaid for the video company. An article in the New York Times referenced YouTube as a “profitless web site” and questioned the “mind boggling valuation.”
The acquisition was the largest by Google at the time, and it helped transform the company. Many now believe the YouTube acquisition by Google was one of the best deals of all time.
In the last fiscal year, YouTube ads brought in $28.8 billion in revenue, out of the $257.6 billion total for the company, representing over 10% of company revenue.
The YouTube segment has also increased Alphabet’s presence in the streaming market with an offering that includes its own videos and content from other media partners with YouTube TV. Alphabet also recently became the new partner of the National Football League for NFL Sunday Ticket, which could boost its television subscribers.
Alphabet highlighted the NFL Sunday Ticket deal with several commercials during Super Bowl LVII, suggesting the company will be aggressive in advertising this new offering to lure in new subscribers.
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Investing $1,000 in GOOG: Investors who liked the buyout of YouTube or saw the potential of Google’s growth with the video component being added have been pleasantly rewarded.
Shares of Google traded at $430 on the morning of Oct. 10, 2006, the day after the YouTube acquisition was announced.
A $1,000 investment in Google stock could have purchased 2.33 shares at the time. Google had a two-for-one stock split in 2014 that would have turned the investment into 4.66 shares. A 20-for-one split would have made the investment a total of 93.20 shares in 2022.
The 93.20 shares would be worth $8,802.74 today, based on a price of $94.45 for Alphabet shares at the time of writing.
This represents a hypothetical return of 780.3% over the last 16 years and 4 months. The investment in Google would have produced an average annual return of 47.8% over the last 16 years and 4 months.
For comparison, the SPDR S&P 500 ETF Trust SPY, which tracks the S&P 500 has returned 304% over the same time period, representing an average annual return of 18.6%.
The purpose of the hypothetical investment is to show how values of stocks can increase over time and how key events like acquisitions and product releases can be major catalysts for the companies and the valuations of their stock.
If an investor had chosen to put money in Google after the YouTube acquisition was made public, they would have been going against the grain of popular opinion. There were many critics who said that Google had paid too much and that it did not fit into their overall strategy.
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