Google’s cloud business ‘really not gaining share’ against Microsoft, Amazon: Analyst

Third Bridge Global Sector Lead for Technology, Media, and Telecom Scott Kessler joins Yahoo Finance Live to discuss Alphabet earnings, YouTube beating Netflix in revenue, and what interest rate hikes mean for Big Tech companies like Facebook, Microsoft, and Amazon.

Video Transcript

- Let's bring in our first guest for the hour. We've got Scott Kessler, Third Bridge Global Sector Lead for Technology, Media and Telecom. Scott, we just kind of walked through the numbers on Alphabet. What stood out to you?

SCOTT KESSLER: Well, thanks a lot for having me. Look, this is a company that generated $250 billion in revenue and saw an increase of well over 30%. That's largely organic revenue. Obviously, I think some of the comparisons benefited from what we saw in the prior year in 2020. But I think it's fair to say that this is a very strong and healthy business.

Obviously, I think a lot of people were focusing in, as you were talking about, regarding Google Cloud and Google Cloud Platform, indications of mid 40% growth, again, healthy to strong. However, I'd point out that Microsoft talked about Azure revenue growth that was very comparable.

And not only is AWS, as was referenced earlier, much bigger than Google Cloud Platform, but actually you have Azure much bigger as well. And so the fact that they're growing at comparable rates means that they're really not gaining share against Azure, a much bigger competitor.

- Hey, it's Brian Cheung here. So on that point, Scott, I mean, have we reached, already, a maturity in the market where we shouldn't expect to see Google kind of very largely gain any more market share here? I mean, it seems to me at this point that the cloud services business is really all about how aggressive your sales team is.

SCOTT KESSLER: Yeah. And actually, that's a good point, Brian. Right? So I think Alphabet made the point of indicating that they've tripled their sales force since 2019. Obviously, look, we're talking about a lot of people who are committed to trying to unearth revenue opportunities, whether it's new or existing business opportunities, especially with respect to Google Cloud and Google Cloud Platform.

Look, I mean, they have single digit market share in this category. And even though I think a lot of people understandably are applauding Alphabet's results, I think they need to consider, structurally kind of going forward, how they get that market share significantly higher. Because it doesn't seem like AWS or Azure, the parent companies obviously, talking about Amazon and Microsoft, they're not taking their feet off the pedals, so to speak.

And so really it's going to be interesting to see how the market share kind of shifts just among those companies. There's no question that, when you look at Google Cloud and Google Cloud Platform, they're gaining share overall but not necessarily significantly from the two big players ahead of them in this marketplace.

- You know, Scott, this comes at a time when we've seen a big sell off in tech names. It felt like Apple's results last week kind of calmed the waters a bit. You've got good numbers from Google coming out. Meta reporting after the bell today.

Have we seen the worst of those declines? And yes, I'm kind of asking you to call the bottom here. But in other words, is the narrative from the earnings calls, or just the results, starting to take shape again, as opposed to these jitters around what these interest rate hikes are likely to mean for these high growth companies?

SCOTT KESSLER: Yeah, I mean, look, it's the question everyone's thinking about. And going back to Azure, I think folks started to kind of become maybe reasonably more optimistic when last week Microsoft indicated that they were expecting acceleration in Azure growth on a sequential basis. Suddenly then, people started to feel more comfortable.

You mentioned, I think, some other companies, Apple obviously, increasing revenues of a double digit rate, I think was encouraging. You look at a company like ServiceNow, I think, as a cloud focused SaaS company. They delivered results that people perceive very positively. Also, a number of semiconductor companies have offered some positive news over the past week. So I think there are a number of reasons to be optimistic.

One thing that I would look out for, though, is we have Meta platforms and Snap coming up. And those companies, more so than say Alphabet, have been affected by Apple's IDFA changes. And so I think some people might be well, kind of, served by being a little bit more cautious. Because I think there's a little bit more in terms of what's going to go on there from a negative impact to those types of businesses.

Alphabet isn't as influenced, Google isn't as influenced, by those changes for a variety of different reasons. And the advertising business actually outpaced overall company revenue growth. So that's noteworthy.

I guess the one negative I would point out for Alphabet/Google, other than maybe a tepid one when we're talking about cloud performance relative to competitors, is really the legal and regulatory backdrop, where we've talked to experts day in and day out, and they tell us that Google/Alphabet, they're more exposed from US antitrust perspective to risks, and possible changes, than maybe any other big tech company. People aren't thinking about that at this moment, but they should keep that in mind.

- Well, Scott, you know, we've been talking a lot about the regulatory headwinds with regards to maybe trying to break up these large companies. But I guess something more tangible, and maybe a more relevant discussion, might be how does this impact any sort of strategic visions that some of these large tech companies might have with regards to further M&A?

Do you see any appetite from the likes of Google Alphabet that might have ambitions to buy another company, but simply won't do so right now, or wants to sideline themselves, because of the regulatory headwinds out of DC?

SCOTT KESSLER: Yeah, so Brian, short answer is yes. We hear that all the time, frankly, from the industry experts that we speak to. The reality is that these companies make a lot of sense as acquirers for a lot of companies and businesses, especially given the reduction in valuations we've seen over the last couple of weeks and months.

But the reality is that there is limited appetite to deal with some of the legal and regulatory issues. You know, Alphabet yesterday touched upon Fitbit and some of the benefits of that acquisition. That was a pretty small deal, and it took a pretty long time to complete.

So what I thought was interesting is it seems like Alphabet is, well, maybe not doubling down in a literal sense, but they talked very specifically about the fact that CapEx has been around $20 to $25 billion for the last few years. And they expect a substantial increase in that number in 2022. They went through a number of different areas where they look to invest.

So expect more internal type of investment. Last year they talked about $7 billion being committed to expanding offices and data centers in the US. They're going to be spending a lot of their own money on a lot of initiatives, moonshots or otherwise, to kind of move the company forward.

- All right. Moonshots remain the key. Scott Kessler, Third Bridge Global Sector Lead For Technology, Media and Telecom. Thanks so much for stopping by this morning.