Every investor is aware that Alphabet Inc (NASDAQ:GOOGL) is a force to be reckoned with. It upended and re-imagined search in the 1990s and has gone on to dominate a number of platforms, including mobile (Android), video (YouTube) and maps (… well, Maps). Those factors have driven GOOGL stock to 1,600%-plus returns since it came on the market back in the mid-2000s.
However, while people typically tout Alphabet shares over search dominance, Android and YouTube, Google Cloud Platform (GCP) rarely seems to hit the radar.
When it comes to enterprise cloud computing, Amazon.com, Inc. (NASDAQ:AMZN) and Microsoft Corporation (NASDAQ:MSFT) get the bulk of the press with their respective AWS and Azure products. But it’s a mistake to underestimate Alphabet’s GCP in this category, and certainly to write it off.
Even if that’s what the market seems to be doing now.
Part of the reason may be the way companies report — Amazon finally started breaking AWS figures out separately a couple years ago, whereas Alphabet doesn’t provide much in the way of GCP specifics.
That could change in the coming years as its cloud service ramps up.
Alphabet Redoubles Its Cloud Efforts
Alphabet is leveraging its existing competitive advantages and reassessed its strategy. During the Q1 conference call, CEO, Sundar Pichai, emphasized the company’s renewed efforts in cloud:
“On the Cloud stuff, talking about go-to-market… in Q1 our largest growth in headcount and CapEx was in Cloud. So we are thrilled with the progress we have made there since Diane [SVP of GCP] arrived, building out world-class sales, marketing and engineering teams.”
Google has reorganized their go-to market strategy around the Office of the CTO and Advanced Solutions Lab (machine-learning experts). This creates a customer centric organization with one face to the client that goes beyond sales representatives. Technical folks are involved so GOOGL can better troubleshoot in real time and garner valuable direct feedback.
This has contributed to some big client wins, including Airbus SE (OTCMKTS:EADSY), Home Depot Inc (NYSE:HD), Schlumberger Limited (NYSE:SLB) and Evernote, among many other household names.
GOOGL is far better equipped to help major corporations that require massive amounts of storage and computing. Superior security and being at the forefront of machine learning and speech recognition APIs are other areas where Alphabet integrates everything for its end customer, demonstrating its potential.
Will Amazon’s AWS Win the Cloud Unchecked?
It seems foolish to think that just because Amazon Web Services has the early lead, that a) this will lead to a winner-take-all scenario whereby a virtuous cycle for AMZN continues and volume increases, unit costs go down, thus driving more business to AWS to the exclusion of other players; or b), Azure and GCP will always remain in the game but in a small way (despite crazy growth numbers).
GCP will be a driver for GOOGL stock somewhere down the road, possibly in the next year or two.
I’d like to bring your attention to a Google Horizon presentation last year. Diane Greene, SVP of Google Cloud Platform, indicated that year-over-year revenue growth rates were 10x in storage revenue growth, 4x in computing revenue growth and 25x in container revenue growth.
AWS may have the lead, but GOOGL is barreling down from behind.
I have seen sell-side reports with GCP doing $450 million-$500 million in 2015, and Diane stated that the business is growing at leaps and bounds. Based on that, I can get to around $2.5 billion to $3 billion of estimated cloud run rate revenue. Slap an even 10x multiple on that and you get to $30 billion, growing at warp speed.
Bottom Line on GOOGL Stock
GCP is currently unprofitable, to all existing knowledge, but I wouldn’t bank on that being the case forever.
So, while Google Cloud Platform is currently behind both AWS and Azure, there are certainly levers to pull to close the gap. Between explosive growth numbers, a worldwide IT spending TAM of $3.5 trillion, and the renewed focus to position GCP, it would be a mistake for anyone analyzing GOOGL stock to underestimate Alphabet’s fast-growing strength in the cloud game.
As of this writing, Luce Emerson did not hold a position in any of the aforementioned securities.
