Google’s Cloud could give more lift
Selective disclosures are insufficient for a business now generating $8 billion in annual revenue
Google provided a valuable peek into its cloud business. A deeper look would add even more value.
In its second-quarter earnings call last week, executives of parent company Alphabet Inc. disclosed that its Google Cloud Platform is now at a “run rate” of more than $8 billion a year in revenue. That implies the business has roughly doubled in size since the company’s previous notable disclosure early last year, when it claimed its cloud service was generating about $1 billion a quarter.
Google makes highly selective disclosures about its cloud operation, but investors still have tended to receive the news well. The most recent details, plus signs of improvement in the core advertising business, drove up Alphabet’s stock price nearly 10% following its quarterly report.
Google, to be sure, still has a long way to go to catch up to cloud leaders Amazon.com and Microsoft. Amazon’s AWS segment generated revenue of $30.2 billion for the 12-month period ended in June. Microsoft reported $38.1 billion in commercial cloud revenue for the same period. Its Azure commercial cloud service alone generated about $12.5 billion for the 12-month period, according to estimates from JPMorgan.
Competition is heating up elsewhere, though. Legacy enterprise technology vendors such as IBM and Oracle also are aggressively pursuing business in the cloud and they have longestablished corporate relationships to back them up. In a report last month, Jefferies analysts estimated that both companies are now generating more than $7 billion a year in revenue from cloud services. Estimates for IBM don’t include its recently completed acquisition of Red Hat.
Yet while Google hardly has the market to itself, the addressable market for corporate cloud services is still large enough that the company should manage strong growth even if its rivals keep doing so as well.
A recent survey of chief information officers by Goldman Sachs found that Google’s traction in the market “has improved considerably in the past six months.” It should be more open about its potential.
Amazon certainly was when it began breaking out its own cloud results in early 2015. AWS was generating just over $5 billion in annual revenue or just over 5% of the company’s total annual revenue at the time— similar to the contribution Google Cloud is making to Alphabet’s business now. Amazon’s disclosure has played no small part in the company’s fivefold surge in market value since.
There is a key difference: Unlike Amazon, which made most of its revenue at the time from a low-margin retail operation, Google has a highly profitable main line of business. But search and advertising face regulatory scrutiny, not to mention slowing growth. Highlighting the promising cloud business can help the stock gain more altitude.