Google (GOOG): NFL Sunday Ticket Is Expensive But Worth It

Google: $2B Deal To Seal Its Move For NFL Sunday

Alphabet Inc. (NASDAQ:GOOG, NASDAQ:GOOGL) (“Google”) rode its way to the NFL with a significant deal. Accordingly, YouTube will pay about $2B per year for the NFL Sunday Ticket franchise, reportedly for seven years.

Google won it under the noses of Apple Inc. (AAPL), who reportedly ended discussions as NYT indicated the Cupertino company “became skeptical that the Sunday Ticket package was worth what the NFL was seeking.”

Apple already has its Major League Baseball deal, while Amazon.com, Inc. (AMZN) secured its rights to Thursday Night Football. Accordingly, Insider reported that Amazon “has been happy” with its Thursday Night Football performance.

Therefore, it could have spurred YouTube into shelling out a relatively high $2B (that Apple spurned) to secure its rights for its NFL Sunday ticket, which is considered “a centerpiece of American sports, (which) have remained defiantly tied to traditional TV.”

Notwithstanding, the deal excludes games that air on local markets and games available on other networks during the week. Hence, TV retains its stranglehold over sports programming, but YouTube’s foray has changed the algorithm.

We believe YouTube CEO Susan Wojcicki is spot on regarding the significance of the deal toward its membership base, as she articulated:

YouTube has long been a home for football fans, whether they’re streaming live games, keeping up with their home team, or watching the best plays in highlights. – YouTube Blog.

YouTube’s Breakeven In The Near Term Unlikely

Now on to the terms of the deal. Note that the deal falls under YouTube TV and YouTube Primetime Channel from the 2023 Season. Accordingly, the deal will leverage YouTube’s 2B monthly users and “at least 5M subscribers and trial accounts for YouTube TV.”

The math in which DirecTV, owned by AT&T (T), had been losing $500M per annum on the deal seems to make little sense initially. With the $2B deal, YouTube TV would need to reach at least “6.7M subscribers to break even” (considering maintaining the current price of $300).

Moreover, the NFL highlighted that the viewership in the 2021 season reached an average of 17.1M per game. Hence, we believe the math could prove challenging for YouTube even to reach breakeven in the near term. Which probably explains why Apple decided to walk away.

Google Needs Drivers To Answer To Competitive And Macro Headwinds

But investors need to consider this: Google’s Search business has slowed down markedly. Recent reports suggested that Google CEO Sundar Pichai was apparently concerned with the release of ChatGPT for public preview. According to the NYT, Pichai has amped up the pace to respond to the competitive threat posed by such Generative AI models:

Sundar Pichai has been involved in a series of meetings to define Google’s AI strategy, and he has upended the work of numerous groups inside the company to respond to the threat that ChatGPT poses, according to a memo and audio recording obtained by The New York Times. Employees have also been tasked with building AI products that can create artwork and other images, like OpenAI’s DALL-E technology, which has been used by more than three million people. – NYT

Therefore, we believe it’s imperative for Google to find more drivers to diversify its reliance on its Search business further. Given YouTube’s dominant position in ad-supported streaming and UGC content, the move to integrate sports streaming into its franchise makes sense.

Notably, it should also help YouTube to broaden its competitive edge against Netflix (NFLX) and possibly TikTok (BDNCE) as they compete for eyeballs in an increasingly competitive market.

eMarketer also suggested that “YouTube will get squeezed from (Netflix and TikTok)” in 2023 in their bid for viewers and view time. It accentuated that “U.S. adult viewers will spend more time watching Netflix than users will spend on either TikTok or YouTube through 2024.”

Therefore, with the ad headwinds potentially worsening in 2023, Google needs to ramp up its competitive edge by cementing its edge with younger viewers as it aims to level up with TikTok.

Takeaway

At a valuation of 9.3x NTM EBITDA, GOOGL last traded close to the two standard deviation zone under its 10Y average. Hence, GOOGL seems too cheap here.

While its competitive edge has been eroded as its share in the digital ad market has fallen, the ad behemoth has also been making significant moves to rejuvenate investors’ interests.

As former ESPN digital executive John Kosner aptly highlighted: “With this deal, the three major sleeping giants have all woken up.”

Maintain Buy.