Alphabet investors are happy to see more clarity over Google’s cloud computing earnings and growth from focusing on vertical markets.
Dec. 11, 2020
As a technology company and innovator, Google (GOOGL) is a pioneer. However, as a service provider, Google has always been playing catch-up. Google Cloud remains a distant third in the cloud infrastructure market behind rivals Amazon Web Services (AWS) and Microsoft’s Azure. However, after a rocky start, Google has taken a different approach to cloud computing by improving services for separate divisions.
Furthermore, Google’s CEO Sundar Pichai said earlier this year it will begin reporting operating income for its cloud business as a separate segment to give investors more transparency. Pichai explained: “with the segmentation, you will additionally see information about the scale of our investment, which will help gauge the progress we are making on the multi-year path ahead to create sustainable value.”
Google’s shift in cloud computing strategy
Google’s greatest obstacle is taking on AWS. The company is used to challenging market monopolies, but whilst it dominates the search and online advertising industries, it has struggled to crack the streaming industry, smartphones, and now cloud computing markets, of which it only occupies around 7% globally. Many in the industry expected Google to abandon the business, as it did with Google Hangouts and Allo.
However, when it hired former Oracle VP Thomas Kurian as the head of Google Cloud in 2018, Google changed its strategy for enterprise applications, workload migrations, and application modernization. Kurian’s strategy was to go after vertical markets such as retail, financial services, telecommunications, media, and entertainment. With Amazon closing in on the online advertising space, Google made a big change to how it handles e-commerce listings.
Since then, Google cloud computing has become the top cloud service provider for retailers worldwide. Google began hiring aggressively and establishing partnerships with Best Buy, which named Google Cloud as the provider of its data enterprise platform in a multi-year agreement, to accelerate its retail penetration. Google Cloud used its strength in advertising and search to win some big clients, including Costco and Target. The California-based company believes its private network, AI, and big data will help differentiate it from its rivals.
Pichai noted in Google’s third-quarter earnings that free shop listings, zero commission fees for the Buy on Google feature, and opening up the platform to Shopify and PayPal for integration have also really helped its e-commerce segment grow in 2020.
The COVID-19 emergency has dramatically affected retail, forcing many businesses to adjust by focusing on their e-commerce functions. As a result, retailers are looking to cloud service providers to support their businesses with key technologies. As e-commerce demand surged, business owners looked for a cloud service provider that not only supplied computing and storage but also retail-specific solutions and support teams — and that’s exactly what Google’s cloud computing provides.
Google remains particularly strong in multiple areas including billing, network, and security which have helped its cloud computing business grow. Read more about Google Cloud’s strengths here.
In the third quarter of 2020, Google’s earnings surged 24% year-over-year by cutting back on hiring, marketing, and capital spending during the pandemic. Cloud computing revenue climbed 45% in Q3 to $3.44 billion, beating analysts’ estimates of $3.29 billion. For the first time ever, Google will announce cloud profitability in its December-quarter earnings.
Google bulls say that its cloud computing is beginning to take market share as it focuses on security, data analytics, and open-source software. Its acquisition of Looker, a data analytics firm, for $2.6 billion has boosted the business. Experts predict that by 2021, Google’s cloud business will grow 44% to $19 billion in revenue.
Is Alphabet stock a buy?
Some investors argue that Alphabet, the parent company of Google, has long passed its glory days when it gained 800% in the three years after its initial public offering. In recent times, Alphabet shares tend to keep pace with the S&P 500, with brief periods of outperformance. During the pandemic, the stock has lagged behind its Big Tech rivals Apple, Amazon, and Facebook.
However, by focusing on vertical markets and growing its e-commerce services, 2021 could be telling a different story for Google.
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MyWallSt operates a full disclosure policy. MyWallSt staff currently holds long positions in companies mentioned above. Read our full disclosure policy here.