Catch GOOG Stock on the Way Up
Alphabet Inc (NASDAQ:GOOG) makes most of its money from advertising. Its “AdSense” program has been driving growth for years, but that well is running dry. GOOG stock’s next chapter of growth will have to come from another business entirely.
I’m talking about data centers. According to senior Google executive Diane Greene, the company is “dead serious” about breaking into the cloud-computing business. It is aggressively expanding its facilities with the hope of challenging “Amazon Web Services” (AWS). (Source: “What Cloud and AI Do and Don’t Mean for Google’s Data Center Strategy,” Data Center Knowledge, May 19, 2016.)
AWS is currently the market leader, there’s no question about that. It was the first to the party and it hasn’t stopped growing. Smaller rivals have tried to catch up, but Amazon’s size and depth of resources is too overwhelming.
That being said, AWS hasn’t yet faced a competitor like Google. The two companies are matched evenly on scale and wealth, so it could be a knock-down-drag-out fight.
Even if AWS held onto its market-leading position, there is enough space in the market for two 800-pound gorillas. Cloud computing is steadily becoming the most important backbone of corporate America and increasingly more firms are outsourcing their IT departments.
I like to think of it as the equivalent of outsourcing manufacturing jobs.
Think about it: in the 1990s and 2000s, American companies were outsourcing their manufacturing jobs to save money. Companies shipped those jobs to low-wage developing countries because the cost of production was next to nothing.
It was terrible that so many blue collar Americans lost their jobs, but a business must make money. When it has a proposal to cut costs and raise profits, it has to do it. In other words, the logic of outsourcing was bulletproof.
Cloud computing is just as undeniable, but without such a high cost of blue-collar jobs. Instead of companies buying their own servers or data centers, they simply buy space on Google’s data center. They are outsourcing their IT.
Since Google and Amazon are already building these enormous data centers for their own businesses, they are able to achieve economies of scale for each unit of storage. They can always make use of more data centers because both companies process so much information.
Google’s data centers handle every sent e-mail, queried search, or saved picture on the “Photos” app, making sure its servers don’t crash under that kind of pressure. Think about how upset you would be if Google.com didn’t work.
Google manages to avoid this nightmare scenario by building a ton of data centers that handle the rapid growth of information. Now they’ll be leasing out some of that space and computing power to other companies.
AWS used this business model to drag its parent company into the black. It is expecting sales for cloud services to reach $10.0 billion this year, which means Google stockholders could expect similar revenue targets within a few years. (Source: “Cloud Unit Pushes Amazon to Record Profit,” The Wall Street Journal, April 28, 2016.)
This cloud-computing revolution is more than just a phase; it is a permanent rising of the tide, an inevitable cash cow for any firm with the scale and resources to pull it off. Google certainly fits that description and it helps that it has a history of success.
Between now and 2017, the company will be opening data centers to access 10 new urban areas. To put that into context, most data centers are currently being built in rural areas, where real estate is cheap and zoning restrictions aren’t that big of a problem. But urban centers are key when it comes to offering cloud services, so Google is moving fast. It is opening a new facility in Tokyo, Japan and the hope is to eventually have enough of a global presence that customers will choose them simply for the sake of convenience.
Many analysts—and I’m one of them—think this market could be bigger than online advertising. Just think about that for a second. The industry that lifted Google stock to $700.00 a share ($480 billion in market cap) could be smaller than cloud computing.
Even if Google doesn’t win a monopoly like it did in search-based advertising, the company could still see its profits grow at a rapid clip.
You know what that could mean—a surge in GOOG stock. I wouldn’t be surprised if the share price reaches $1,000 over the next few years.