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October 10, 2006

Google / YouTube - Wall Street Analyst Comments on Deal

posted by MR WAVETHEORY at 10/10/2006 04:52:00 AM
Below are the Google (Nasdasq GOOG)/ Youtube comments from Wall Street Analysts. All of the firms below make markets in Google stock and/or options, so take their advice with a grain - make that 2 grains - of salt. I will kick things off with the comments from the one and only, the master of the Internet universe, Henry Blodget, the $500 target Amazon.com man - who is the only one who doesn't make a market in Google stock or options. Actually, I think Henry makes a good point about Google stock. Read on.

It's also worth noting that Sequoia and YouTube could easily have taken some cash off the table, but instead chose to go long Google stock at more than $400 a share. Yes, there are tax considerations, but if you think Google's stock has top-ticked (or even if you just wanted to reduce risk), you would take some cash. Both Sequoia and YouTube obviously have insight into Google's performance in Q3 and the current quarter, and neither party, presumably, would want to celebrate the closing of the deal by loading up on a tanking stock. The exchange rate has yet to be set, so Sequoia and YouTube could be gambling that a bad third-quarter report will temporarily hobble the stock, but this seems a bit too clever. So, on balance, amid the Yahoo-problem-or-industry-problem worries, probably a positive stamp of approval on Google's current business trends.
--Henry Blodget of Amazon.com fame and Internet Outsider, who is the only unbiased analyst on Google stock
* * *

While it is counter to Google's general preference to build rather than buy, and the company already has a similar offering in Google Video, we believe Google recognizes the value of YouTube's leadership position and its strong brand name in the fast-growing video space. … By owning YouTube, Google may be able to bring content holders to the negotiating table earlier and in a more strategic way than otherwise might be possible.
--Douglas Anmuth at Lehman Brothers, who has an "overweight" rating and $530 price target
* * *

Google [acquiring] YouTube … would catapult Google to the number one position in online video and greatly enhance its ability to leverage social networks to improve search monetization. … In addition to a greater share of online video advertising, Google could potentially generate fees from YouTube video purchases. The deal would also enhance Google's prowess in monetizing social-networking sites, an area it aims to begin to develop in the fourth quarter with MySpace….
--Marianne Wolk at Susquehanna, who has a "positive" rating
* * *

It would be a radical departure from its mergers-and-acquisition strategy, which has been almost exclusively based on tuck-in technology deals; 2) … the $1.6 billion would also be almost equal to Google's entire M&A spending to date; and 3) It would acknowledge that Google Video has failed to gain sufficient traction. The clear positive for Google -- synergies between the world's third largest user-generated content site and arguably one of the world's largest and most scalable advertising/computer networks could be enormous.
--Citigroup Inc.'s Mark Mahaney, who has a "buy" and $550 price target
* * *

We think a … Google/YouTube deal makes a lot of sense from a long-term business perspective, but the legal issues will likely remain clouded for some time. … The price tag of about $1.6 billion is difficult to justify on a spreadsheet and may be somewhat of a throwback to the days of paying for eyeballs and pageviews, but this is a strategic bet that Google would be placing for a long-term objective: to be THE technology and distribution partner for content owners and publishers. With YouTube's traffic and buzz, Google could quickly try to build its position as the video advertising clearinghouse online…. As we have said many times in the past, Google is a company building its capabilities for the long term, and thus far, we think it has made many strategically positive steps. Yes, a potential YouTube acquisition is a bet, but it's just the kind of bet we'd expect from Google.
--UBS analyst Benjamin Schachter, who has a "neutral" rating and $450 target
* * *

Google would likely capture additional search revenue in addition to video advertising revenue from YouTube. Google recently signed a deal to be the exclusive search and keyword sales provider for [News Corp.'s] MySpace.com, guaranteeing a minimum $900 million over the next three years. A YouTube acquisition would enable Google to retain all of the economics on search advertising on the site. … Much of the content on YouTube is free, and many video clips are copyrighted material from traditional media companies. Google could be responsible for filtering out copyrighted material or negotiating revenue-sharing partnerships with the owners before aggressively monetizing YouTube. On a positive note, the large YouTube user base could help Google sign new content partnerships.
--Justin Post at Merrill Lynch & Co., who has a "buy" rating and $500 price target
* * *

The combination of Google and YouTube may make it easier to secure distribution agreements for copyrighted video content. In fact, both companies today announced agreements with Sony BMG Music Entertainment and Warner Music Group for their music video libraries, giving users access to free (ad supported) music videos. In addition, Google will be able to offer its paid video content to the vast YouTube audience. Not only would Google's relationship with content owners give YouTube access to premium video content, it would also bring it a little closer to solving the copyright problems on the site. Having said that, the fact that YouTube was able to secure two agreements on its own today (with Universal and Sony, adding to its existing agreement with Warner) implies potentially less risk as the company is moving more towards the mainstream.
--Jefferies analyst Youssef Squali, who has a "buy" rating and $500 price target
* * *

Google shares should benefit from these announcements [involving Warner Music and Sony BMG] as they reinforce its commitment to further developing verticals that will enable it to better engage its users. Additional video inventory, combined with the deal with MySpace, enable Google to offer advertisers a more expansive user base and the opportunity to create branded campaigns to run on Google and its affiliate sites. These deals, similar to those which YouTube also has in place, could simplify a potential integration between the two companies.
--Anthony Noto at Goldman Sachs Group Inc., who has an "outperform" rating and $525 price target

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