Google, the artists now known as Alphabet (NASDAQ:GOOGL), practically invented the cloud but was nearly a decade late to the cloud market. Amazon (NASDAQ:AMZN) has an estimated 33% share of the cloud infrastructure market. Microsoft (NASDAQ:MSFT) has half of that, 16%. And GOOGL has half of that, at 8%.
It is trying to make up for lost time. Under Thomas Kurian, formerly of Oracle (NASDAQ:ORCL), the company is selling “hybrid cloud” to enterprises, a world where its cloud seamlessly interacts with those of its rivals, and with corporate data centers. A level playing field, Alphabet hopes, will grow its market share.
But will it really do any good?
Who’s Number One? You’re Number Three
According to Synergy Research Group, which studies the cloud marketplace, Google faces a long, uphill slog.
Microsoft took three years to get from being a quarter of the size of Amazon to half its size in cloud, said John Dinsdale, chief analyst at SRG. Between them, the two companies represent half the market. Google’s share is growing, but Amazon remains bigger than the next four competitors — Microsoft, Google, Alibaba (NASDAQ:BABA) and Tencent (OTCMKTS:TCEHY) — combined.
Microsoft, meanwhile, is less focused on the infrastructure opportunity than selling software as a service, where it has 23% of what will be a $100 billion market by this time next year. Here Google is thrown together with nine other vendors which are each a tenth of Microsoft’s size.
The lesson is that, for all the talk about hybrid cloud and interoperability, cloud may be as sticky as other software services. The one you start with is the one you stay with.
Since joining Google last November, Kurian has been on a shopping spree, buying Alooma, Looker and, this month, Elastifile, a file storage company. These deals have made Google a solid number-three in the market, while cutting out channel partners. But they’re expensive. Hybrid cloud is the hottest niche in the hot technology market.
Does GOOGL Win?
Kurian’s big deal may benefit VMware more than GOOGL, making it a better hybrid cloud play.
This also makes Dell Technologies (NASDAQ:DELL) a big winner, because it owns 82% of VMware. Like the previous controlling shareholder — EMC — Dell operates VMware autonomously, while accounting for it in its own results.
VMware has been operating on Microsoft Azure since April. VMware also has a partnership with International Business Machines (NYSE:IBM), which is also, like GOOGL, focused on the hybrid cloud market since its acquisition of Red Hat.
Since the start of the year, shares in Alphabet are up 17%, buoyed recently by that second quarter report. But shares in VMware are up almost 30%. The average NASDAQ stock is up almost 25% so far in 2019.
Bottom Line on GOOGL Stock
Google has the financial strength needed to build a place for itself in the cloud re-sale market, providing fuel for GOOGL stock price appreciation.
But it’s unlikely to challenge either Microsoft or Amazon for cloud market leadership, and its efforts to build hybrid cloud are going to be costly.
This means investors are going to rely on its free and public services, like Google search and YouTube, for growth. During the fourth quarter, Google properties continued to grow at a 17% annual rate, while constant currency revenues continued growing at a 22% annual rate. GOOGL stock is selling at about 25 times earnings and pays no dividend.
But as regulators continue coming after Google and YouTube, Google Cloud is going to have to start pulling its weight for the company to prosper. The question is whether it can do that as the market’s third wheel.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new environmental story, Bridget O’Flynn and the Bear, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN, BABA and MSFT.