YouTube Case Study

1
YouTube Case Study

• Question Is YouTube likely to earn its cost of
  equity?
• Answer Depends on the credibility of the
  assumptions underlying the forecast
• Test NPV PVFCFE I 0, Implies PVFCFE must
  be 1.65 billion (Purchase Price)

2
YouTube Case Study Estimating Base Year Cash Flow

• (Revenue/Month)YouTube (Revenue/Unique
• Visitor/Month)About.com x
• 
  YouTube Unique Visitors/Month
• .15 x 34 million
• 
  5.1 million
• (Net Income/Month)YouTube (Revenue/Month)YouTube
  x Google net profit margin
• 5.1 million x .25
• 1.28 million
• 3. Assuming depreciation equal capital spending
  and ?working capital zero, then base year free
  cash flow to equity (FCFE) is
• FCFEFullYear (Net
  Income/Month)YouTube x 12
• 1.28 million x 12
• 15.4 million

3
Underlying Assumptions

• To realize a PVFCFE 1.65 billion if discounted
  at 10, we have to assume
• Base year FCFE would have to grow at least 225
  percent annually for the next 15 years
• FCFE would grow at 5 percent annually during the
  terminal period
• Results
• PVTV 1,005 million
• Total PV 1,610 million
• PV15yrs 605 million

4
Sensitivity Analysis

• Assuming a higher revenue per unique visitor
  figure would result in a lower projected rate of
  growth of free cash flow to equity
• However, assuming YouTubes cost of equity is the
  same as Googles may be optimistic. A higher
  discount rate to reflect YouTubes probable
  higher level of risk would offset assumed higher
  revenue per unique visitor figure.