What’s Next for GOOG Stock
Alphabet Inc (NASDAQ:GOOG) is making inroads in the cloud computing industry by scoring huge contracts with big-name clients. This high-margin business could open a new chapter of growth for GOOG stock.
Cloud computing has grown wildly popular in recent years. Rather than house their own servers and mainframes, companies simply outsource their infrastructure needs to third-party vendors like Amazon.com, Inc., with its “Amazon Web Services.”
Bear in mind that Amazon Web Services (AWS) is by far the most profitable segment of Amazon. It was solely responsible for pushing Amazon into the black last year, a laudable feat considering how thin the margins are elsewhere in the company. (Source: “Amazon’s Lofty Profits Open Cloud to Rivals,” Bloomberg, March 24, 2016.)
That’s what I mean when I say cloud computing could be Google’s ticket to higher growth. The Internet is creeping into all corners of our lives, so it only makes sense that more and more businesses need resources to run online.
Someone has to fill that Internet-as-a-service (IaaS) role, and I think Google is a natural fit. The company has deep pockets, limitless resources, and a savvy workforce. Google should have stepped up competition in this sector earlier.
But then again, IaaS only came of age as an industry in the last few years. Less than a decade ago, the industry simply couldn’t deliver high-quality services at a low cost. The tradeoffs made less sense for clients, so there was bound to be less demand.
Companies like Amazon and Salesforce.com paved the way. Unfortunately, paving the way means that other businesses can follow you down that road. And why wouldn’t they? In business, if someone succeeds, you copy them before everyone else does.
Google is doing just that. The company is also free to launch a price war in this market, driving out smaller competitors. Although I doubt Google be able to topple Amazon, there is more than enough market share left for GOOG stock to gobble up. For instance, the company recently started migrating back-end data for Spotify. (Source: “Spotify is moving its data to Google Cloud Platform,” Engadget, February 24, 2016.)
If you haven’t heard of Spotify, it is essentially a Netflix-for-music platform with 75 million subscribers. As you can imagine, Spotify has a ton of data to store, which translates to a ton of cash in someone’s pockets.
In this case, Spotify chose Google’s “Cloud Platform” to store and process core computing infrastructure. Spotify has already transferred several hundred thousand accounts to Alphabet’s servers, with the remaining 74+ million on the way.
This deal reminds me of a similar contract between Netflix and Amazon. By signing Netflix, Amazon guaranteed itself a client with enormous data that couldn’t afford to leave. (Source: “Netflix finishes its massive migration to the Amazon cloud,” Arstechnica, February 11, 2016.)
Can you imagine moving hundreds of millions of accounts to save just a few bucks? Neither can I, nor can Google. The company took a page out of Amazon’s playbook when it came to cloud computing. Like Netflix, Spotify is a giant platform, just with music instead of movies. As such, it is also too large to pick up and leave at the drop of a hat, so Google is safe there.
And just like AMZN stock, I think GOOG stock could skyrocket for having a greater stake in this market.