Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) beat Yahoo! Inc. (NASDAQ:YHOO) and everyone else on the internet through a relentless focus on search and its infrastructure. Now GOOGL is executing the most important pivot of its corporate life … the company is moving toward application software.
![Alphabet Inc: Why Cloud Apps Are the Next Big Thing for GOOGL Stock](https://investorplace.com/wp-content/plugins/lazy-load/images/1x1.trans.gif)
Traders will likely ask only whether it maintains its 15% year-over-year growth rate, and whether it can keep up its 25% operating margins. They may wonder whether GOOGL stock will ever split and when Alphabet might pay a dividend.
Analysts are expecting Alphabet to deliver $8.04 per share in earnings and $20.76 billion in revenue when it reports earnings after the market closes Thursday. They are hoping for $8.20.
GOOGL Investors Should Keep an Eye On This …
What long-term GOOGL investors should be focusing on, in my view, are the company’s efforts to change the conversation around cloud. That means looking at the company’s capital expenditures and teasing out how much is being spent on data centers, how much on fiber build-outs and how much on developing new software.
It’s no secret that Alphabet is trailing Amazon.com, Inc. (NASDAQ:AMZN) in the business of re-selling cloud capacity. It was very late to the business and brought on a true expert in cloud sales, Diane Greene, late last year.
Her strategy focuses on changing the subject, away from raw cloud capacity, toward artificial intelligence. As is true elsewhere, Google is “eating its own dog food,” using its AI software to cut power costs for instance, but it’s also creating software to the market for instantaneous translations and voice interaction, software that can replace call centers.
Software is increasingly the theme across Alphabet. Software makes Virtual Reality more real. Software improves international data speeds. Software keeps out robocalls. Software combats climate change.
By focusing on the building blocks of AI, based on open source software called Tensor Flow, and building applications itself across a broad front, GOOGL hopes to give enterprises a reason to ditch Amazon’s servers for its own. The move also takes Alphabet “up the stack” — away from the commodity of raw computing power, toward the proprietary profits of software delivered as a service.
Just how powerful this can be is illustrated by the success of Pokemon Go, created by an Alphabet spin-off called Niantic Labs, acquired in 2004. The application combines smartphone cameras, maps and a social game called “Ingress” to place cartoon characters in the real world.
The game won’t be material to the results announced this week, but it has opened enormous potential markets that can only be tapped using scaled clouds like those that GOOGL manages, and sophisticated software that, while written using open source tools, is proprietary to Google.
The hard part is turning consumer attraction into enterprise applications. GOOGL does not yet break out its cloud revenues in its balance sheet, as Amazon does, but it would not matter much if it did. That’s true because the key to Google Cloud is its evolution into a software business.
The Bottom Line: With a tech company, what it is can be less important than what it plans to become. Like Amazon, Alphabet still has miles to go before it reaches its potential.
Dana Blankenhorn is a financial journalist who dabbles in fiction, his latest being The Reluctant Detective Travels in Time. Write him at danablankenhorn@gmail.com or follow him on Twitter @danablankenhorn. As of this writing, he owned shares of AMZN and GOOGL.