One of the least-appreciated elements of the cloud-computing phenomenon is the sheer size and scope of the three largest players in the market, all hidden inside much larger businesses.
The best understood and most analyzed is Amazon Web Services, a business which arguably accounts for more than half of parent
(ticker: AMZN) valuation, and which as we have written before might be one of the 10 largest companies in the world on a stand-alone basis.
(MSFT) has made a huge commitment to Azure, the software giant’s cloud business, and the stock market has responded by pushing up the company’s market cap to more than $1 trillion. Azure is about half the size of AWS, which would still suggest the business is worth more than almost any free-standing public software company.
Google Cloud is the #3 player in the market, and investors arguably aren’t giving it much weight in their valuation of
(GOOGL) shares—but that might be a gigantic mistake.
Deutsche Bank analysts Lloyd Walmsley and Kari Keirstead recently did a deep dive on Google Cloud, and write in a pair of research notes—one focused on Google Cloud itself, the other on the implication for the valuation of parent Alphabet—that the market’s misunderstanding of the business is profound.
They see Google Cloud growing revenue at 55% annually through 2021, reaching $17 billion—and contributing about 7% of the company’s pretax earnings by that time. (That assumes margins substantially below those of Amazon Web Services.) The analysts note that the Google Cloud business has two parts: G Suite, which includes things such as Gmail and Google Docs; and Google Cloud Platform, or GCP, which competes with AWS and Azure. They see GCP growing 64% compounded annually through 2021, with a more modest 13% growth for G Suite.
They place a 15 times revenue multiple on GCP, with a 5 times revenue valuation for G Suite, and discounting back find that the total Google Cloud business is worth about $225 billion, or close to $325 per Alphabet share. That valuation suggests Google Cloud is worth more than the market capitalizations of
(IBM), SAP (SAP),
com (CRM), and even
The two analysts further conclude that the market is currently valuing the Google Cloud business at zero. And that’s where the opportunity lies.
They are uber-bullish in particular on Google Cloud chief Tom Kurian, who joined the company in 2018 from Oracle, where he had been president of product development. The analysts note that Kurian has been hiring up a storm as the company takes on both AWS and Azure head-to-head in large corporate accounts.
“For years we were skeptical of Google Cloud’s chances of closing gaps with rivals Amazon Web Services and Microsoft Azure and concluded that Google was on track to be a special-purpose cloud (largely for analytics workloads) and a distant third in terms of share,” Walmsley writes. “While we have yet to see Fortune 500 enterprises really embrace Google Cloud, over the last six months we’ve become increasingly impressed with the changes made under new CEO Tom Kurian…[T]he inflection in Google Cloud under Mr. Kurian with improving disclosure helps bolster the bull thesis around Alphabet’s shares.”
Based on this bullish thesis on Google Cloud, Walmsley boosted his price target on Alphabet to $1,600 from $1,475, and logically enough maintains his Buy rating on the shares; at that level Alphabet shares would inch over the $1 trillion level and challenge Microsoft’s position as the market’s most valuable business.
On Friday, Alphabet stock closed at $1,210.96, up 1.81%, while the Dow Jones Industrial Average rose 1.4%.
Write to Eric J. Savitz at email@example.com
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