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YouTube's the Big Winner

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March 09, 2007 – Comments (0)

When Google (Nasdaq: GOOG) announced last year that it was going to buy YouTube, the team was mum on YouTube's financial details and how it valued the company. On the conference call announcing the deal, Google chief counsel David Drummond said the purchase price was "very fair." In acquisition-speak, that usually means one thing: overvalued.

 

In the 10-K Google filed last week, it released more color on YouTube, including financial performance. Given that YouTube was not particularly focused on actually monetizing itself, most people probably figured its financials weren't much to speak of. But for 2006, YouTube managed to put up $10.6 million in revenue and had a sweet 26% net income margin. Woo-hoo!

 

Of course, Google paid $1.2 billion for YouTube, which works out to more than 100 times revenue for 2006 -- or around 400 times net income, if you insist on using such antiquated valuation metrics. Google, which is pretty richly valued itself, currently trades at around 13 times revenue. If you assume Google can triple YouTube's revenue this year and then triple it again the year after that, it really only bought YouTube at 13 times 2008 revenue. That's fair, right?

 

Wait, hold on -- the phone is ringing. Oh, Google? That was the dot-com bubble. It said it wants its ridiculous valuations back.

 

With YouTube, Google brought in a great brand and a lot of eyeballs. What it did not bring in was much in the way of actual revenue and profits. Google also inherited the headaches YouTube itself was trying to ignore -- especially the fact that much of the site's user traffic is for copyrighted material.

 

I do think pretty highly of the people at Google, even if I don't agree with the valuation of its stock, and I wouldn't be surprised if they squeeze some cash out of YouTube after all. The bottom line, though, when you look at that deal, is this: Google may have gotten a good property. But Steve Chen and Chad Hurley (the YouTube founders), along with Sequoia Capital (YouTube's primary backer), made out like bandits. Raise your glasses, gentlemen -- you've done darn well!

 

 

Fool contributor Matt Koppenheffer does not own shares of any of the companies mentioned. 

 

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