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Alphabet Released Cloud Results for the First Time. What’s Clear is that it isn’t a Shoo-in for No. 3 in the Cloud Business
Alphabet last week finally disclosed numbers for its cloud business amid fierce competition from Amazon and Microsoft.
Amazon’s AMZN, +0.43% revenue for Amazon Web Services (AWS) reached $12.4 billion for the fourth quarter and is on pace to exceed $50 billion this year. Microsoft’s MSFT, -0.53% Azure unit returned to 50% growth.
So it was time to find out if the world’s most popular search engine is on its way to becoming one of the world’s largest cloud providers. The answer to that question came in the form of a handful of numbers: Alphabet’s GOOG, +0.29% GOOGL, +0.29% cloud business came in at just over $13 billion for 2020, with $3.83 billion for the fourth quarter, a jump of 47% from the last three months of 2019. Its operating loss was over $5.6 billion.
Alphabet’s cloud revenue was about 30% of AWS’s and 50% of Microsoft’s for the most recent period. It is therefore difficult to suggest that Alphabet is the legitimate next-in-line cloud company after AWS and Azure.
Having said that, the open, transparent reporting that came from Alphabet certainly reflected a more bullish sentiment from the company, especially amid booming revenue and a narrower loss.
One would be justified in wondering about the expectation that cloud will someday turn into a mega-performer for the search and advertising giant. The question, then, is this: Is Alphabet the undisputed third cloud, and how big of an opportunity is the cloud business?
No Consistent Standard Financial Reporting
To properly answer that question, we first need to take a broader look at the cloud ecosystem as a whole, determine just how entrenched Amazon and Microsoft are at the top of it, and take inventory of which companies impact the cloud landscape.
One of the great complexities when comparing cloud players is the fact that the cloud ecosystem provides no consistent standard of reporting. For instance, while clouds come in many flavors, they are most commonly broken into the three buckets of infrastructure as a service (IaaS), platform (PaaS) and software (SaaS), and many companies competing in “cloud” touch more than one of those.
To date, the infrastructure (IaaS) component has been the focal point when establishing cloud leadership, but shifting architectures like hybrid cloud, and the rapid growth of SaaS, suggest that way of measuring may soon become antiquated.
Cases in point: Microsoft Intelligent Cloud incorporates all three cloud types, which in the most recent quarter represents $14.6 billion. At face value, that number is bigger than AWS, which reported $12.4 billion in the quarter. However, AWS numbers reflect what is more traditionally the public cloud stack. Microsoft numbers, for their part, encompass many more facets of cloud, including things like Windows and SQL server.
In trying to do an apples-to-apples comparison, the best number I could parse for Microsoft Azure, Microsoft’s Public Cloud service, was $7.4 billion, based on Microsoft’s estimated market share (20%) versus the estimated total public cloud revenue in 2020 ($129 billion).
Alibaba BABA, -0.49% provides a far more detailed picture of its cloud numbers, which have it sitting in fourth in the cloud game, turning in $2.47 billion in the most recent quarter (reflecting a 50% growth rate).
IBM and Oracle
When we look at IBM IBM, -0.12% and Oracle ORCL, +0.08%, however, which are both very much cloud players too, their reporting is far more complex and layered. These differences, and the absence of an industry-wide standard of reporting, makes understanding growth and opportunity around cloud all the more nebulous an endeavor.
Taking a closer look at IBM, the company has been leaning increasingly heavily into cloud in recent years. Arvind Krishna succeeding Ginny Rometty as CEO and Jim Whitehurst becoming president clearly reflect the company’s cloud ambitions, particularly in enterprise and hybrid clouds. The acquisition of Red Hat is likely to be one of Rometty’s best moves, despite its $34 billion price tag.
Over the past four quarters, the company’s cloud growth has come in at 23%, 34%, 19%, and 8%, respectively. The company’s cloud reporting also includes cloud-adjacent and cloud-enabled products like cognitive services and consulting revenue from its Global Business Services and Global Technology Services units.
Such inclusions make it a bit challenging to get a firm grasp of the company’s precise cloud trajectory. While the fourth-quarter number was a healthy $7.5 billion, it included many elements of IBM’s business that have not traditionally been considered “cloud” by other companies.
Unfortunately, there is no easy way to break down IBM’s numbers to perform a true apples-to-apples comparison with AWS, Azure and Alphabet, but the estimated maximum market share of 4-5% puts it between $5 billion and $6.5 billion for 2020.
Despite a rocky start with early cloud endeavors, Oracle has made impressive strides with its Oracle Cloud Infrastructure business, including some impressive layers of automation in its Gen 2 cloud that make it more scalable and robust.
The company has invested heavily in infrastructure to expand to more than 25 regions, with plans to reach 36 by mid-2021. However, as it pertains to revenue and market sizing, Oracle, like IBM, still has a number of components in its cloud numbers, making it harder to discern the size of its public cloud business.
In Oracle’s most recent quarter, it showed $7.11 billion in its cloud services and license support segment and $1.09 billion in its cloud license and on-premise license. The names of these segments alone indicate cloud, but Oracle’s public cloud business is not doing over $8 billion a quarter. This number encompasses its database revenue, among other things. In the most recent quarter, Chairman Larry Ellison mentioned that the demand for its Gen 2 cloud is up over 100%. But 100% from what number?
Other Big Players
The other notable players in the public cloud space include Salesforce CRM, -2.20%, Tencent TCEHY, +0.49%, Baidu BIDU, -3.93%, SAP SAP, -0.69%, Fujitsu FJTSY, -0.23% and Rackspace RXT, +2.62%. Salesforce does over $5 billion a quarter in SaaS, and its hybrid endeavors are growing with the acquisition of Tableau and the advent of its Hyperforce offering. At this run rate, it could be argued that Salesforce should be in the discussion of top cloud providers. However, due to its lack of an IaaS offering, it is rarely included in such discussions.
Cloud as a Growth Enabler
Another interesting data point to take from all of this is just how big the cloud opportunity still is as a reflection of the overall IT market. Estimates of total worldwide IT spending in 2020 was $3.6 trillion, which means that public cloud-only represented about 3.85% of overall IT spend. Furthermore, only about 30% of today’s workloads run in the public cloud. Meaning the opportunity for public cloud is still significant.
While Amazon and Microsoft are firmly entrenched in the number one and two spots, respectively, a contingent of highly competent companies is jockeying for position, and you can be sure that each has the ambition to be more than just the third cloud. Financial reporting across the cloud leaves a lot of calculus for analysts trying to assess the market opportunity, but the consensus shows stability from Amazon, growth from Microsoft, a small group of companies vying to be the third cloud, and then everyone else.
From an investment standpoint, however, the cloud business’ trajectory continues to provide a robust runway of opportunity, but as these numbers suggest, a significant amount of confusion exists in the space as well.
As the “hybrid” architecture touted by Amazon, Salesforce, Microsoft, Google, IBM, Oracle and every other company competing in this space continues to gain traction, it opens the door for even more accounting complexities, and much needed discussions about where the cloud really begins and ends.
What is abundantly clear, is that Alphabet isn’t the “clear cut” third cloud. Maybe if we are talking just infrastructure, but as cloud proliferates, there are just too many moving parts and variables in play.
Ultimately, there are many things that can be considered cloud, and all of them yield substantial opportunities for top- and bottom-line growth. And if you are chasing portfolio growth in the cloud, all of this financial engineering should serve as a great reminder of why overall growth is almost always a more useful measure than segment growth, and why segment nomenclature should probably come with a caution sign.
Futurum Research provides industry research and analysis. These columns are for educational purposes only and should not be considered in any way investment advice.
The original version of this article was first published on MarketWatch.