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'Another $1 trillion market': How Google could cash in on the cloud boom

Daniel Howley
Technology Editor

The big news out of Google parent Alphabet’s (GOOG, GOOGL) earnings Wednesday, which produced mixed results, was that it finally broke out the numbers for its cloud business. Investors now have a better understanding of how much the division makes, and how it's growing compared to industry heavyweights Amazon (AMZN) and Microsoft (MSFT).

In short, Google's cloud is still a small portion of its overall revenue, especially compared to the market leaders, but it's quickly becoming a greater threat to their dominance.

"Although they [Google] may be trailing domestic industry leaders AMZN and MSFT, the market continues to grow and this could be another $1T market for Google that is only ~10% penetrated," RBC's Mark Mahaney wrote in a note note after the earnings.

People walk past a Google Cloud exhibit during the press days at the 2019 IAA Frankfurt Auto Show. (Photo by Sean Gallup/Getty Images)

The cloud boom

Alphabet was slow to get its Google Cloud Platform out of the starting block compared to the likes of Amazon's Amazon Web Services (AWS), and Microsoft's Azure, and it shows in terms of percentage of overall revenue.

Despite the fact that Amazon and Microsoft are the dominant forces in the public cloud industry, businesses aren't forced to stick with one vendor or the other. In many instances, they'll opt for at least two cloud providers to either to help offset any risk that one may go down, or to prevent being locked into using a single provider over the long run. 

That bodes well for Google as it continues to ramp up its investment in its cloud business.

Alphabet's cloud business for the quarter saw revenue of $2.6 billion compared to overall revenue of $46.07 billion. That means the cloud was responsible for about 5.7% of Alphabet's revenue. 

The bulk of Alphabet's business is tied up in advertising, which brought in $37.93 billion, or roughly 82% of the company's Q4 revenue.

Microsoft's Intelligent Cloud division, which includes Azure, meanwhile, was responsible for $11.9 billion, or about 32% of the company's Q2 2020 revenue. Amazon's AWS raked in $9.9 billion, driving 11.38% of the company's quarterly revenue.

A feature juggernaut

At its current size, Alphabet's cloud business, and its YouTube arm, whose revenue it also revealed for the first time, don't have the strength to overcome the company's slowly decelerating revenue growth.

"Both segments are clearly outpacing core Google advertising revenue growth (16% y/y in '19, down from 22% in '18), but are too small (cloud segment is 6% and YouTube ads is 9% of '19 revenue) to offset that broader decline," Piper Sandler's Mike Olson wrote in his analyst note.

"Said differently, despite the strength of these line items, we continue to model slowly decelerating overall company revenue growth."

A man sits at a Google Cloud exhibit during the press days at the 2019 IAA Frankfurt Auto Show. (Photo by Sean Gallup/Getty Images)

Still, as Alphabet's cloud business continues to grow, the prospect that it could one day overcome the slowdown in ad revenue looks ever brighter. 

Both Amazon and Microsoft have seen significant revenue growth as their respective cloud businesses have taken off, and there are no signs that Google will be any different.

In fiscal 2018, Alphabet saw revenue of $5.8 billion from its cloud services business. That was up 44% from 2017 when it saw full-year revenue of $4.1 billion. In 2019, the company's cloud services saw revenue of $8.9 billion, for a year-over-year increase of 53%.

For now, Google's cloud division is still relatively small. But if its growth continues unabated, the cloud industry could be looking at a third juggernaut alongside Amazon and Microsoft.

That's not to say it'll catch up to or surpass Amazon on its own, though.

As Jefferies managing director Brent Thill told Yahoo Finance's “The Ticker” this week, Google needs to acquire some kind of large cloud provider to play at Amazon's level.

"Amazon is a runaway freight train," he said. "If Amazon's growth slowed to 10% and Google kept the same growth rate, it would take them 7 years to catch them. That just gives you a sense of how far ahead Amazon is."

Still, with businesses looking to multi-cloud solutions, Google has plenty of runway ahead of it to grow at its own pace.

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Got a tip? Email Daniel Howley at danielphowley@protonmail.com or dhowley@yahoofinance.com, and follow him on Twitter at @DanielHowley.

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