On Monday after the bell, Alphabet (NASDAQ: GOOG, GOOGL) reported second-quarter earnings, posting 26% year-over-year sales growth and results that topped Wall Street’s expectations. Alphabet stock spiked slightly on the news, elevating the shares from around $1,205 before the report to about $1,255 in the wake of the results.
Before the earnings report, I noted that Alphabet stock is one of three tech companies whose market capitalization could soon reach $1 trillion. With the earnings beat in the books, Alphabet’s market cap is approximately $873 billion — slightly less than Apple’s (NASDAQ: AAPL) $952 billion and Amazon’s (NASDAQ: AMZN) $894 billion.
But as I wrote in the previous article, there’s a significant difference between thinking that Alphabet won’t be the first company to reach $1 trillion (which is precisely what I believe) and being bearish on Alphabet stock.
Google’s search engine isn’t the main reason for my bullishness on Alphabet stock, although most people think “search engine” when they hear “Google.” Actually, the outlook of Alphabet stock is attractive because of the company’s cloud business. In the last three quarters, the revenue of Google’s “other” segment, which includes Google Cloud, jumped 37% YOY. As a result, numerous financial reporters believe that the performance of Google Cloud sparked the rally in Alphabet stock on Tuesday.
Of course, Alphabet’s “other” segment, which accounts for about 14% of its revenue, is also a much smaller slice of its topline pie than the company’s core business. Consequently, growth in the “other” segment is a bit easier to come by.
Still, the public cloud market is expected to expand 21% this year alone, according to Gartner, and Google is expanding its market share more rapidly than the other major players, including Amazon and Microsoft (NASDAQ: MSFT). Those trends should be positive for Alphabet stock.
During Alphabet’s fourth-quarter earnings call last year, CEO Sundar Pichai told investors and analysts that:
“Google Cloud, which includes Google Cloud Platform and G Suite, has reached meaningful scale, and I’m excited to share today that it’s already a billion dollar per quarter business … In fact, we believe that Google Cloud Platform, based on publicly reported data for the twelve months ended December 2017, is the fastest growing major public cloud provider in the world.”
Of course, Google Cloud has a smaller, easier pie to grow compared to Amazon’s AWS and Microsoft’s Azure, which dominate the cloud market. But the three together still accounted for 55% of the cloud market last year, giving Google enough of a foothold to keep Alphabet stock rising, in my opinion.
With the growth of its cloud business, Alphabet stock represents one of my favorite kinds of investments: a bet on an established company which also has a segment that’s part of a significant mega-trend. Just as you don’t have to pick only one trillion dollar contender to make money, you don’t have to choose the “winner” of the cloud battle to profit from the certain adoption of cloud services.
As of this writing, Robert Martin was long AAPL.