Why Cloud Could Be A Game Changer For Google

While Google (NASDAQ:GOOG) continues to be the world’s dominant search engine, the company’s margin growth is likely to be impacted due to investments towards ensuring that Google complies with data privacy laws across the world. A key growth driver for Google going forward will likely be its Cloud business. Not only does the company’s management continue to invest significantly in the space, it is also the company’s fastest-growing business.

Coupled with Google’s reach, we expect the Cloud business to help the company achieve solid incremental growth. Accordingly, we have revised our price estimate for the company to $1,250 per share. Our interactive dashboard on Is $20 Billion In Google Cloud Revenue Possible By 2020? details our expectations for the business, and examines its potential for Google. You can modify any of the key drivers to visualize the impact of changes, and see all Trefis technology company data here.

Google’s hiring of Thomas Kurian was a clear sign from the company that it is emphasizing moving past its #3 ranking in the cloud space (behind Amazon’s AWS and Microsoft’s Azure) in which its platform has long been stuck. On the company’s Q4 call, management also indicated that significant investments across product and sales areas for Cloud were being undertaken to help reduce the company’s reliance on its search business, which has been a subject of regulatory scrutiny.

We believe Google’s product capabilities and distribution reach can help Google Cloud generate substantial growth in its Cloud business, and potentially move up in the cloud pecking order. In addition to the almost utility-like nature of the company’s search business, the cloud business could help give cash flows a boost.

While Google has only disclosed that in Q4 2017, the company’s cloud business exceeded $1 billion per quarter in revenue, estimates suggest that Cloud may be almost a $6.5 billion per year business for the company.

How Large Can Google Cloud Get In The Near Term? 

• Along with revenues from Google play and hardware, Google cloud revenues are clubbed under the segment ‘Google Other Revenues’
• Gartner estimates that the total cloud market is expected to grow from $182.5 billion in 2018 to 331.2 billion in 2022 at a CAGR of 16.1%.
• We analyzed management commentary over the last six quarters and estimate that the GCP business could have contributed ~$6.5 billion to Google’s 2018 revenue. Going forward, we expect the business to clock a CAGR of 25% over the next 3 years. Our estimates are based on our understanding of the cloud market and Google’s position in it.
• Annualized growth for the other major players in the market has been between 40-60% over the last couple of years. We expect that the scorching pace of GCP’s revenue growth is likely to temper down, resulting in the business’ total revenue reaching $18 billion by 2020, as seen in the chart below. On the basis of our calculation, GCP’s growth could lead to the segment contributing 9% of Google’s total revenue by 2020.

Do not agree with our forecast? Create your own price forecast for Google by changing the base inputs (blue dots) on our interactive dashboard.