Its business model has always revolved around what became cloud computing. The company practically invented it, to scale the search engine. Google’s heritage is replacing people with clouds and data, wherever possible.
Since becoming chief financial officer and de-facto leader almost five years ago, Ruth Porat has delivered investors returns of over 30% per year. Absent the occasional stumble, when a government decides it’s evil, Google brings 20 cents of each dollar to its net income line.
While continuing investment in its cloud data centers, Porat has also built a cash horde of over $120 billion.
Can anything stop her? Yes.
Selling the Cloud
For the quarter ending in December, Alphabet is expected to earn over $3.8 billion, $12.53 per share, on revenue of $46.9 billion. The whisper number is $13.05 per share.
This sounds impressive, except last year’s fourth quarter saw $39.2 billion in revenue. When it comes to the free, ad-based services it’s known for, we may have hit peak Google.
Thus, Porat is investing heavily in re-selling its cloud services. The company made eight acquisitions in 2019, five for Google Cloud. This included Looker, a data analytics platform on which it spent $2.6 billion.
I think it also made a big mistake hiring Thomas Kurian from Oracle (NYSE:ORCL). Kurian has hired thousands of salesmen to gain market share from Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT), which dominate the cloud rental market. There have been small gains, but Google remains third, with just 10% of the market.
While Kurian is beloved on Wall Street, I’m not a fan. Big healthcare software companies, like Epic and Cerner (NASDAQ:CERN), are now avoiding Google. They fear it might do what Oracle did in the 2000s, take them over or seek to bury them.
The Other Bets Problem
Google’s “other bets” are why the company changed its name to Alphabet. These were originally side businesses. They’re the model for Google’s future, according to Sundar Pichai, named CEO late last year.
Verily, the health care bet, now has outside investors, and its own board of directors. Porat is one of them. Critics say Verily’s business model is based on surveillance. It’s one reason Cerner and Epic bailed.
In May, Google brought its Nest home products back into the company. It has made no move to spin out Waymo, which has yet to attract car manufacturers despite having a big head start on self-driving technology. It does have a deal with United Parcel Service (NYSE:UPS), but only in package delivery.
Then there’s Google Fiber, the internet access unit that buried cable in my backyard and never lit it. Google seems to be turning that into Google Fi, a wireless offering. But Google Fi depends entirely on Google infrastructure, and continuing investment, to maintain market momentum.
It may be that the “other bets” aren’t so other after all.
The Bottom Line on Google Stock
Google is now being run the way Morgan Stanley (NYSE:MS), where Porat formerly worked, wants it to be run. This is contrary to the way Silicon Valley works and Google’s own heritage.
Fighting with programmers risks a talent drain. Opaque collection of data risks a customer drain. Hiring salesmen for what should be self-service is simply stupid.
Alphabet is the only one of the cloud giants I can’t recommend buying right now. It’s fully valued, at nearly 31 times earnings. Alphabet pays no dividend. It’s not growing.
It’s time to make Alphabet Google again.
Dana Blankenhorn is a financial and technology journalist. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available 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 and MSFT.