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Here's How Alphabet Plans to Catch Up to Amazon and Microsoft in the Cloud

Alphabet's Google Cloud division, which generated $2.6 billion in Q4, is still very small compared to AWS and Azure. But it's investing aggressively to close the gap.
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In its latest earnings release, Alphabet  (GOOGL) - Get Free Report gave investors a long-awaited look at how its cloud division is doing, and how it’s planning to catch up to Amazon’s  (AMZN) - Get Free Report AWS and Microsoft  (MSFT) - Get Free Report Azure. 

For the first time, the company disclosed how much Google Cloud and YouTube bring in. The former generated $2.614 billion in revenue in the fourth quarter, up from $1.709 billion a year prior and placing its annualized run rate at over $10 billion. 

The question is: What do these figures mean for Alphabet, and for its third-place position in the cloud services market?

“Google wants to show the world that it is more than just an online ad giant,” said Collin Colburn, an analyst at Forrester. “A key metric to watch for: Does search advertising continue to drop as a percentage of total revenue for Alphabet? And does that number decrease due to decelerating search ad revenue growth or accelerating revenue growth in YouTube and Cloud?”

Google Cloud is generating a small fraction of Alphabet’s overall revenues: Its cloud revenue for fiscal 2019 was $8.918 billion, compared to Alphabet’s $162 billion in total sales, the vast majority of which is advertising revenue. YouTube brought in $15.15 billion in ad revenue for 2019.

Google Cloud, which includes both Google Cloud Platform and G Suite, is also small compared to AWS and Azure. Amazon’s AWS, the market leader by a solid margin, generated revenue of $9.95 billion in the fourth quarter alone. Microsoft doesn’t break out revenue for Azure, but told investors that the division grew 62% in Q4 and contributed to revenues of $11.4 billion in its Intelligent Cloud division, which includes many products other than Azure.

On a call with shareholders, Porat acknowledged that Google Cloud has a ways to go before catching up to the competition.

“Given our position as a challenger, we're investing aggressively, focused on building out our go-to-market capabilities, executing against our product roadmap, and extending the global footprint of our infrastructure focused on 21 markets and six industries,” she said on Monday afternoon.

Porat disclosed a few additional details related to how Alphabet plans to expand the division. She said that Alphabet’s 20% growth in headcount was attributable in part to investments in Cloud, notably the team dedicated to bringing new technologies to market. She also noted that Google Cloud Platform, its suite of cloud computing services, is growing at a faster rate than the Google Cloud division as a whole, and that the number of cloud deals worth over $50 million more than doubled year-over-year.

Alphabet CEO Sundar Pichai added that its investments in AI will help it to stand out from the pack and land more large deals over time.

“Especially in one of these larger deals, they are effectively looking for a technology partner. So differentiation is not just what we bring to the table in terms of Cloud where we have differentiated capabilities, but in many cases it's what we bring as Google,” Pichai said. “Over time, I also think the AI-based industry-specific solutions we are working on will end up being a differentiating factor as well.”

Alphabet is due to reveal more about its plans for Google Cloud in April at its annual Cloud Next conference in San Francisco. 

Alphabet, Amazon and Microsoft are holdings in Jim Cramer’s Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells these stocks? Learn more now.