Google Cloud Is Gaining Market Share

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Earlier last week, Google’s parent Alphabet (Nasdaq: GOOG) reported its second quarter results that surpassed market estimates and sent the stock climbing 8% in the after-hours trading session. This was the biggest one-day gain for Alphabet in the last four years and a pleasant change from the last quarter’s disappointing performance.

Alphabet’s Financials

Alphabet’s second quarter revenues grew 19% over the year to $38.9 billion, ahead of the market’s forecast of $38.15 billion. EPS grew 21% to $14.21, compared with the Street’s forecast of $11.30.

By segment, revenue from Google advertising grew 16% over the year to $32.6 billion with revenues from its Network Members’ growing to $5.27 billion. Revenues from Google properties came in at $27.3 billion compared with $23.3 billion reported a year ago. Other Google revenues that includes cloud revenue grew 40.4% to $6.18 billion. Revenues from Other Bets grew 12% to $162 million. The losses from the Other Bets segment grew from $732 million a year ago to $989 million for the quarter.

Among operating metrics, total acquisition cost (TAC) as a percentage of Google Advertising revenues fell 1% to 22% driven by TAC for Google Network Members falling to 69% from 71% a year ago. Paid clicks on Google properties increased 6% while the cost per click on Google properties was down 1%.

Alphabet’s Growth Focus

During the quarter, Alphabet continued to release new products. Within search, it redesigned its mobile search page and brought a full coverage feature to search to better organize news results. It also integrated augmented reality into Search to allow users to see 3D results of their searches where feasible. It is developing AI to help the users make informed decisions. For instance, its AI will allow Google Maps users to see how crowded their next train is or how late their bus is. It also added additional visual information to Google Maps and a new navigation warning system to help users understand where a natural disaster is and better anticipate where it may be headed.

Last week, it introduced the gallery Go App which is a way for people living in low connectivity areas to manage their photos and videos while offline. In view of the ongoing privacy concerns, the company recently announced new privacy improvements that give users clear choices and more control around their data. Privacy controls are now more easily accessible. Google has expanded its incognito mode to maps and also added a new auto delete control.

Within hardware, the company recently introduced new phones including Pixel 3a and Pixel 3a XL. The phones have been received well by the market and are available in the US through T-Mobile, Sprint, U.S. Cellular, Spectrum Mobile, and additional partners. Besides phones, its hardware segment includes Home focused devices that are now being integrated under the Nest brand. Last quarter, Google launched the Nest hubs in 12 additional countries. The new Google Nest Hub Max is a voice activated smart display powered by the Google Assistant that will be available later this summer.

YouTube remains a focus area for Google. Channels with more than 1 million subscribers grew by 75% over the year. Its monetization strategies are helping customers increase their revenues and during the quarter, it noted that thousands of channels had doubled their total monthly revenues. It is pushing for subscription services and now YouTube Music and YouTube Premium are available in more than 60 countries. To continue to drive adoption, Google will allow YouTube Original series, movies, and live events to be made available for free, supported by ads. YouTube TV with its 70-plus channels will also be accessible as a stand-alone lineup in Google Preferred.

The biggest news for Alphabet though was its Cloud business. During the quarter, it announced that the Cloud segment was trending at an annual revenue run rate of over $8 billion. The last time that Alphabet had disclosed its Cloud revenues was in 2017, when the segment was generating annual revenues of $4 billion. While the business has doubled in two years, it is sill a quarter of Amazon’s revenues. For comparison, Amazon recently reported quarterly revenues of $8.1 billion for AWS.

According to a recent report published by Jefferies, Amazon will continue to see a decline in its public cloud market share as rivals like Microsoft and Google eat into the space. Amazon’s share is expected to drop from 70% in 2017 to 57% by the end of 2020 while Google’s share will grow from 22% to 28% in the same period. Here is an interesting infographic, courtesy ZDNet reflecting this shift in pattern.

Google continues to invest in improving its Cloud offerings. Earlier this year, it had announced Anthos, the cloud service that focuses on providing advanced security and open architecture to support multi-and hybrid Cloud environments. Anthos is helping Alphabet attract more customers, especially in the financial services sector. Last quarter, it added KeyBanc to its list and saw HSBC as an early adopter of the service.

To support this rapidly growing customer base, Google broke ground on three data centers and launched its new Osaka Cloud region, the seventh in Asia Pacific. It also announced plans for a new Cloud region in Las Vegas, its seventh in the United States. Amazon remains the market leader in the cloud, but Google is driving big focus in the market and expects to triple its cloud computing salesforce over the next several years as part of this effort.

Earlier this year, Google also announced its big acquisition of the year when it added big data analytics platform Looker for an estimated $2.6 billion. Founded in 2011, San Francisco-based Looker has been working on the business intelligence and the analytics market. Prior to the acquisition, Looker had raised $280.5 million from investors including Alta Park Capital, PremjiInvest, CapitalG, Goldman Sachs, Redpoint, Kleiner Perkins, Cross Creek, Meritech Capital Partners and Kleiner Perkins. Its last round of funding was held in December last year, when it raised $103 million at a valuation of $1.6 billion. It had over 1,600 customers and was operating at revenues of more than $100 million. Google plans to integrate Looker to improve its smart Analytics platform.

Its stock is currently trading at $1,239.41 with a market capitalization of $863.9 billion. It has fallen from the record high of $1,289.27 it had climbed to in March this year. Last December, when most technology stocks fell, Alphabet’s stock had fallen to a 52-week low of $970.11.

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