Google's Cloud Won't Have Amazon's Silver Lining -- Heard on the Street
February 01 2021 - 7:29AM
Dow Jones News
By Dan Gallagher
As Google steps on the gas at its burgeoning cloud business,
investors would do well to remember that this is no cheap ride.
When parent company Alphabet Inc. reports fourth-quarter results
Tuesday afternoon, the company plans to break out its Google Cloud
business as a reportable segment. That will include information on
the unit's costs and profitability; Alphabet has been reporting
Google Cloud revenue for a year now. The additional details should
bring the company more in line with its top cloud peers Amazon.com
and Microsoft, both of which report segment profitability for their
respective -- though not easily comparable -- cloud operations.
Investors have typically welcomed such details. Amazon's share
price more than doubled in 2015, helped greatly by the company's
decision to break out numbers for its AWS cloud business. Those
details showed AWS to be more profitable than expected -- and way
more profitable than Amazon's retail business. AWS's operating
margins were 12% in the first quarter of 2015 and they climbed to
24% by the end of the year. Amazon's retail side was generating
operating margins of less than 2% at the time.
That will be very hard for Google to match, though. Amazon in
2015 had a very big lead in the cloud market, which gave it the
ability to take some profits while still investing heavily in the
business. Google -- running a distant third to Amazon and Microsoft
-- is playing an expensive game of catch up. Its capital
expenditures have averaged 14% of revenue over the past five years
compared with 10% for both Amazon and Microsoft. Speaking of
Google's Cloud business, Alphabet Chief Financial Officer Ruth
Porat said on the company's last earnings call that they "do intend
to maintain a high level of investment given the opportunity we
see."
Google also has a much more profitable mainstay business. With
81% of revenue still coming from advertising, Alphabet's core
Google division has generated operating margins of 24% over the
past four quarters. The cloud represents Google's best shot yet to
diversify that business, so Google is right to shine more light on
it. Investors should just brace for some sticker shock.
Write to Dan Gallagher at dan.gallagher@wsj.com
(END) Dow Jones Newswires
February 01, 2021 07:14 ET (12:14 GMT)
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