Alphabet Opens Up On Cloud Business

Management took the opportunity to talk up Alphabet’s (NASDAQ:GOOGL) cloud business on yesterday’s earnings call. So for the first time, we got to know that the business generated a billion dollars a quarter in 2017.

This is far behind market leaders Amazon (NASDAQ:AMZN) that reported AWS revenue of $4.331 billion in the December quarter and Microsoft (NASDAQ:MSFT) that hit its $20 billion total cloud run rate target (Microsoft arrives at the figure by annualizing sales in the last month of the last-reported quarter). International Business Machines (NYSE:IBM) also did $17 billion in cloud business last year. The Google Cloud compares more closely to Microsoft, which also includes productivity solutions in its growth estimates.

Alphabet’s number is impressive for a number of reasons. The company has come up from behind to gain quite a bit of traction. Amazon launched AWS way back in 2006, while Microsoft started Azure in 2008. The Google Cloud didn’t launch until 2012, so it’s the youngest of the three. Moreover, it wasn’t until 2015 that the company got VMware co-founder Diane Greene to head its cloud initiative. So the company has made a lot of progress in a relatively short time, which has been possible only because it has been using cloud technology internally.

Today, in the words of CFO Ruth Porat, it is “seeing the benefits of a fully featured enterprise offering and an expanded go-to-market team,” leveraging Google’s strengths in “infrastructure, data analytics, security and machine learning.”

In the words of CEO Sunder Pichai “We are also increasingly doing larger, more strategic deals with customers. In fact, the number of deals worth over a million dollars across all cloud products more than tripled from 2016 to 2017.”

Its deepening relationships with partners like Cisco (NASDAQ:CSCO) , SAP and Salesforce are helping drive customer wins. Google has had relatively more success with smaller and newer customers, which is why it currently has 4 million paying customers for G Suite. But its real challenge is in picking up larger customers that might have their legacy workloads on Microsoft for example. This won’t be easy without compelling products of its own that can do much the same thing. That’s why it’s encouraging to hear that it does have that product lineup today.

Not only that: Google is now able to offer up some differentiation as well by integrating its machine learning capabilities. Management said on the call that they recently gave Google Cloud customers access to its AutoML tool that helps to build in more complex situations. The tool was very well accepted with over 10,000 customers signing up to try it in a matter of weeks.

In the quarter, Alphabet reported earnings of $9.70 (excluding the impact of one-time adjustments related to the new tax law) that still missed the Zacks Consensus Estimate of $10.12 on sales that exceeded slightly.

Alphabet has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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