Why the Snapchat IPO Is Great for Alphabet Inc.

Snap IPOA Tailwind for Google Stock

Like all initial public offerings (IPOs), Snap Inc.’s debut on the stock exchange is a mixed bag. It has the potential to break in either direction, which doesn’t mean there aren’t definite upsides.

For instance, the Snapchat IPO was basically free advertising for Alphabet Inc (NASDAQ:GOOG), otherwise known as Google. Or, at least for Alphabet’s “Google Cloud” computing platform.

That’s one of the highlights from Snap’s S-1 filing with the U.S. Securities and Exchange Commission (SEC).

“We rely on Google Cloud for the vast majority of our computing, storage, bandwidth, and other services,” read the filing. “Any disruption of or interference with our use of the Google Cloud operation would negatively affect our operations and seriously harm our business.” (Source: “Form S-1 Registration Statement,” U.S. Securities and Exchange Commission, February 2, 2017.)

This was a routine disclosure for Snap. You’ll find similar statements in every public company’s quarterly filings, so don’t be alarmed at the wording of the text. In fact, forget what the disclosure means for the Snapchat IPO.

I’ve written about that elsewhere—here I want to discuss what it means for Alphabet.

Snap is, and has been for some time, one of Google Cloud’s biggest clients. The “camera company” is paying Google $2.0 billion over the next five years, with room for more if the user base continues to expand. Since the entire point of the Snapchat IPO is for Snapchat to raise the money needed for expansion, it’s logical to conclude that Alphabet stands to profit from the Snapchat IPO.

Alphabet, the Internet giant, spent the last few years buying and building data centers. It is battling hard to dethrone traditional IT vendors like International Business Machines Corp. (NYSE:IBM), a bold ambition if I ever saw one. But the risk is worth the potential reward.

Why? Because poaching big corporate contracts could send Google (GOOG stock) soaring by double or even triple digits. This is a fast-growing, high-margin business. Google is one of the few that can compete with the veterans of IT, but it needs better branding. Having the size, deep pockets, and engineering talent isn’t enough—something more is required.

Corporations have to believe that Google Cloud is safe, secure, and reliable. After all, Google is asking them to take a chance by abandoning their legacy IT vendors. As such, Google needs to make an aggressive sales pitch, because that’s how you win big clients. It helps when it can say, “Snap is on its way to being the next Facebook, and its entire business is run on our cloud.”

Amazon.com, Inc. (NASDAQ:AMZN) experienced a similar boom by drawing Netflix, Inc. (NASDAQ:NFLX) onto its cloud. Clients gravitated towards “Amazon Web Services” (AWS) thereafter, because business executives trust numbers. When they see a major firm voting with their dollars, choosing one provider over another, they start to pay attention.

Unsurprisingly, the Netflix deal led both revenues and Amazon’s share price to astonishing new heights. It’s an open secret that AMZN stock’s 120% gain in the last two years was due to the success of AWS, so I’m bullish on Google following Amazon down this road.

The Snap contract could be a homing beacon for other large clients, thus turning Google Cloud into a larger part of Alphabet’s bottom line. I wouldn’t be surprised at all if Google stock doubles its market value in 12 to 18 months.