Google is continuing to bet heavily on its cloud-computing services, and while this business may be experiencing steady growth, losses are still increasing.
For the first time ever, Alphabet’s (NASDAQ: GOOG) Google broke out income and losses for its cloud-computing business in the company’s fourth-quarter earnings call on Tuesday. Following the report, Alphabet shares skyrocketed and are opening today at $1,919.
Google’s cloud computing growth
The search giant said it made $13 billion in revenue in 2021 from its cloud-computing services, up 46% from last year. However, Google’s cloud business also generated a $5.6 billion loss.
Google had a strong sales strategy to win over corporate clients in cloud-computing in 2020 after hiring former Oracle executive Thomas Kurian. However, the financial report suggested that even after Google gained many customers during the quarter, the division is still far behind its cloud rivals Amazon and Microsoft.
While Google’s losses in cloud-computing may look drastic, there are different ways shareholders can look at this. Yes, losses are mounting, up from $4.6 billion in 2019, but revenue is also growing, up from $8.9 billion in 2019. So what we are seeing here is Google betting big on cloud and investing heavily in its future, which is a good thing as this industry is only set to get bigger every year.
Alphabet CFO Ruth Porat explained on Tuesday’s earnings call:
“Google Cloud revenues were $13.1 billion for 2020, with significant ongoing momentum, and we remain focused on delivering value across the growth opportunities we see.”
Google is making a lot of investments into Google Workspace, which many still refer to as G Suite. Porat said that Workspace is seeing strong growth among many large corporate clients, “which are signing meaningful, long-term commitment agreements.” On top of that, Google also made some pricey cloud acquisitions last year by securing several billion-dollar deals — including AppSheet, Stratozone, and Dataform.
Furthermore, data centers are expensive and Google Cloud announced four new regions for its hubs in 2020 and began working on other locations.
In Seattle, Google’s cloud rival Amazon reported revenue of $12.74 billion for its Amazon Web Services (AWS) in the fourth quarter alone and operating income of $3.56 billion. For the entire year, AWS’s operating income was $13.5 billion. Microsoft’s cloud segment Azure does not yet break up revenue.
Google advertising is gaining back momentum
Alphabet’s strong overall performance in Q4, with total revenues of $56.9 billion, was largely driven by Google’s search advertising and YouTube ads. It increased by 23% on an annualized basis in the quarter, an improvement on the 17% growth in the same period for 2019.
Advertising revenue for Q4 came out at $46.20 billion, up 22% from the same quarter last year. This turnaround proves that Google’s ad business is recovering after it slowed down during the second quarter of 2020 after the pandemic first hit, which resulted in advertisers pulling back on spending.
YouTube ads brought in $6.89 billion in Q4, showing a 46% jump from this time last year when it recorded $4.72 billion. Philipp Schindler, Google’s chief business officer stated during the earnings call that YouTube now reached more 18-49-year-olds than all other linear TV networks combined.
What’s next for Google Cloud?
As it stands, Google’s core search and advertisement businesses are essentially subsidizing its cloud expansion. Porat also stated that Google’s cloud unit will continue hiring in sales and technical roles. Amazon and Microsoft may not be taking the lead in cloud computing for much longer.
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