Google Stock: Can Cloud Help Alphabet Inc (GOOG) Surge?

GOOG StockAlphabet Inc (NASDAQ:GOOG) is not used to playing catch up. Google has run away with the search engine market, its “Android” operating system is installed on more mobile devices than any other, and its “Chromecast” leads the streaming device market. The company also has several projects in the works, including driverless cars, Internet broadband services, and online grocery delivery that might propel GOOGL stock to new heights. But one area in which Google trails—and by a huge distance—is cloud computing.

Growth in the cloud computing market is taking off. It’s expected to rise to $27.4 billion in 2016 compared to $14.9 billion in 2014, according to Synergy Research Group. (Source: “Amazon and Microsoft to Face Off in Cloud Computing Space,” Market Realist, February 9, 2016.) The majority of cloud revenues are generated from infrastructure as a service (IaaS).

For investors looking to get in on a cloud computing play, two companies often come to mind: Amazon.com, Inc. (NASDAQ:AMZN) and Microsoft Corporation (NASDAQ:MSFT), known for “Amazon Web Services” (AWS) and “Microsoft Azure.”

Amazon holds a commanding lead, with 36.9% of the market, while Microsoft is second with 8.7% . Lowly Google is not even close to being a threat, with about only 2.5% of the market. (Source: Ibid.) Looking at those numbers, it looks like Google doesn’t stand a chance of becoming a market leader.

Even Microsoft CEO Satya Nadella scoffs at any competition other than Amazon. “While many companies are developing commercial cloud offerings, there are really only two driving enterprise cloud platform innovation at massive scale: Amazon and Microsoft,” he said during a conference call. (Source: “The Cloud Is Raining Cash on Amazon, Google, and Microsoft,” Bloomberg, October 22, 2015.)

Google has been slow to get into the market and this has allowed for Amazon to build a $9.6-billion business. According to Morgan Stanley, Google’s cloud business generates only $500 million a year, which is not even close to what Amazon’s AWS makes. (Source: “The Tech Exec Who Wants the Cloud to Be Google’s Moneymaker,” WIRED, March 23, 2016.) Google, with its enormous resources, has been slow in this segment because the company builds services that are used for free, with ads appearing on those free services. It does not sell them but the company is looking to change that.

The search engine giant has been beefing up its cloud division since the company named Diane Greene chief of the cloud business in November. Just last week, Google announced that it is going to open cloud data centers in Oregon and Japan, with plans to add another 10 over the next 12 to 18 months.

The additions will bring the number of Google cloud data centers to 15. By comparison, Amazon currently has 12, with plans to open another five (Source: “Google Cloud Chief Ignites Expansion To Catch Amazon, Microsoft,” Investor’s Business Daily, March 22, 2016.)  It looks like Google’s plans to take its cloud business more seriously are starting to pay off already, luring customers away from rival Amazon.

In a big win, Google announced last week that it has reeled in Apple Inc. (NASDAQ:AAPL) as a customer for its “Google Cloud Platform.” The deal will help Google catch up to Amazon a bit, as it reported that the contract is worth between $400 and $600 million. (Source: “Apple-Alphabet Cloud Accord Could Help Google Catch Up With Amazon,” Investor’s Business Daily, March 23, 2016.) Apple will now be using cloud services from both Amazon and Google.

Google also scored a victory and landed another blow to Amazon last month by securing Spotify as a customer. The leading music streaming music service announced that it will be transferring most of its services away from Amazon and onto Google Cloud Platform.

The Bottom Line on GOOG Stock

Google used to report cloud revenues under the “Other Revenues” section in its quarterly and yearly reports, before recently transferring it to revenues under “Google.” The company is playing catch up with Amazon, but that also means Google can grow its cloud business by taking away market share and taking advantage of the overall growth in cloud computing.

Urs Hölzle, Google’s eighth employee and former cloud chief, believes that revenue from the company’s Google Cloud Platform could surpass Google’s advertising revenue within five years. This would transform Google’s business and GOOG stock could take off as well.