YouTube could be a story to watch for Alphabet's (GOOGL) earnings this evening.
Shares of the search and advertising king are gaining ahead of earnings as many expect the company to come in over the low bar set by analysts.
However, it is not search that is one of the keys to analysts noting the undervalued nature of the stock. Instead, its subsidiary products, namely YouTube, are key growth theses.
"We believe Alphabet retains compelling opportunities to continue driving strong advertising growth in Search, YouTube, and Maps, and retains significant growth opportunities in cloud, hardware, and Other Bets," KeyBanc Capital Markets analyst Andy Hargreaves said in his earnings preview. "This combination should support sustainable growth that we believe is undervalued at current levels."
Mar Vista Investment Partners, a California based investment firm that holds over 127,00 shares of Alphabet, added to the bullishness, highlighting Alphabet as a top "high conviction pick" for 2019 for its $3.4 billion portfolio.
"Beyond its core search business, Alphabet owns several businesses with more than one billion monthly average users," the investment team wrote in a letter to clients. "The company enjoys monopolistic strongholds over these large addressable markets, which provides virtually infinite returns on tangible capital."
The primary business that reaches billions of users is YouTube, of course, which reaches a staggering 1.5 billion monthly users. It remains second only to Facebook (FB) in terms of monthly active users on social platforms and boasts six times the engagement of Snap Inc.'s (SNAP) snapchat. That figure is only growing.
With that reach, the advertiser interest in the platform is undeniable, which could be a key catalyst for an earnings beat in the fourth quarter.
"We did pick up advertiser feedback reflecting accelerating YouTube budgets as we have entered a period of relatively easier comparisons given the boycotts following brand safety concerns in 2017," Credit Suisse analyst Stephen Ju noted.
That is not to mention the company's efforts to further monetize its video platform through subscription services that look set to cash in on cord cutting.
"We continue to see positive traction for our newest subscription experiences," CEO Sundar Pichai told analysts in the third quarter. "YouTube Premium YouTube TV and YouTube Music Premium are continuing to expand to many new countries."
If this rate of expansion is hit on again during the company's earnings this evening, the underlying entity could provide a big boost for the stock. According to Statista, cable providers have lost millions of subscribers in recent years, so it would stand to reason that YouTube would be a key beneficiary of this trend as consumers cut the cord.
"We continue to believe there is meaningful runway across search and YouTube as ROI improves and TV dollars shift more online," J.P. Morgan analyst Brian Anmuth said, making precisely this point.
To be sure, the platform is a drag due to the investment necessary in the platform, which is typically at its height in the fourth quarter.
"We expect seasonal impacts to our other cost of sales from hardware sales which are typically higher in the fourth quarter of the year as well as from increased content acquisition costs for YouTube, which have also historically been higher in the fourth quarter," Pichai pointed out in October.
As ubiquitous as YouTube is at present, even those costs might not do much to sour investors on the product in any event.
At the very least, the streaming and video platform remains a key catalyst for investors to watch this evening.
TheStreet's Eric Jhonsa will be live blogging the Alphabet earnings release and call starting at 3:45 p.m. ET. To follow along, click here.