When it comes to the lucrative cloud opportunity, leaders include companies like Amazon.com, Inc. (NASDAQ:AMZN) and Microsoft Corporation (NASDAQ:MSFT). But there is one that often gets ignored: Alphabet Inc (NASDAQ:GOOGL).
This should not be a surprise. For the most part, GOOGL is known for its ubiquitous consumer apps, which generate mostly ad revenues.
Cloud Should Drive GOOGL Price
But over the past few years, the company has been making an aggressive play for the enterprise cloud market. And for the most part, this should help to fuel the GOOGL stock price.
Granted, it’s tough to gauge the size of the cloud business. Keep in mind that the company does not break out the revenues.
Despite this, there are still many proof points that the business is a growth-driver for the GOOGL stock price. Note that the cloud segment is part of the “Other” line item on the income statement, among other offerings such as hardware. During the latest quarter, revenues in this category came to $3.41 billion, up 40% on a year-over-year basis.
Something else: On the earnings call, CEO Sundar Pichai spent a good amount of time talking about the cloud. He noted: “(We) continue to make progress winning over enterprise customers. Customers tell us they are switching to Google Cloud Platform because of our prowess in data analytics and machine learning, our commitment to being an open platform with tools like Kubernetes, which runs in both cloud and hybrid environments and our leadership in security.”
GOOGL Racks Up AI Deals, Partnerships
The consumer business is actually a key part of the success. After all, GOOGL has the benefit of having to scale technologies for billions of users. This has meant significant investments in infrastructure, such as a global footprint of data centers.
Yet there are other important things to keep in mind:
- GOOGL has been making key acquisitions in AI, striking deals with 20 companies like DeepMind and Kaggle. There have also been over 30 venture capital investments in startups. As a result, GOOGL has been the source of much innovation. An example of this is the must-have platform for AI, called TensorFlow, which has over 6,000 open-source repositories online.
- The company has been putting together strategic partnerships. One of the latest is with Cisco Systems, Inc. (NASDAQ:CSCO).
- GOOGL has been racking up more marque clients. During the latest quarter, they included biggies like Paypal Holdings Inc (NASDAQ:PYPL) and Kohl’s Corporation (NYSE:KSS).
Note that Diane Greene, who heads up the Google Cloud business, is not shy in her ambitions. She believes that company will be the No. 1 player in five years. And she definitely has the right background to do this: She co-founded VMware, Inc. (NYSE:VMW) back in the late 1990s.
As for the cloud opportunity, it is certainly enormous. According to research from Gartner, the market is forecasted to grow at an average compound annual rate of 18% to $383.5 billion by 2020.
Bottom Line On GOOGL Stock Price
Even with the massive size of GOOGL, the company is still growing at a robust pace. For the latest quarter, revenues jumped by 24%. This was actually up from 20% in the same period a year ago.
The valuation on GOOGL stock is still at reasonable levels. Consider that the forward price-to-earnings multiple is 25X and that the company is expected to grow at about 24% over the next few years. In other words, GOOGL stock looks like a pretty good value, especially since the company is nicely positioned to benefit from a variety of megatrends like online advertising, mobile, AI and yes, the cloud.
Tom Taulli runs the InvestorPlace blog IPO Playbook and is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.