Google Cloud is growing fast, but it would ‘take a miracle’ for it to catch up to Microsoft and AWS in the short term, analyst says (GOOG, GOOGL)

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Google Cloud CEO Thomas Kurian at Google Cloud Next 2019

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Google is bullish about its cloud business, and investing heavily as a result. But while Google Cloud growth is strong, analysts say, it still lags far behind its top rivals Amazon and Microsoft. 

Google announced Tuesday that Google Cloud generated $3.8 billion in revenue in Q4, a 47% increase from the same time the year before, and $13 billion in annual revenue, up 46% from 2019.

The unit is far from profitable — reporting a loss of $1.2 billion in the fourth quarter and $5.6 billion annually in 2020 — that’s not necessarily surprising, says John Dinsdale, chief analyst at Synergy Research Group. Businesses like Google Cloud require significant upfront investment and buildout of infrastructure, so they may not even break even for a long while, Dinsdale says. For example, Amazon Web Services launched in 2002, but Amazon didn’t break out AWS numbers until 2015, when it revealed that its cloud business was profitable

Google Cloud expects that its pace of investment will increase in 2021, as it aims to triple the size of its salesforce in the near-term, focus on its products, and build out more data centers worldwide.

“To succeed in these markets you have to have a long-term perspective,” Dinsdale told Insider.

This quarter marked the first time Google broke out Google Cloud as a separate reporting segment in its earnings, and Dinsdale says the numbers show that the unit is on a “pretty good trajectory.” 

Google boasts deal momentum and new partnerships

The shift to remote work last year benefitted Google Cloud, as did strong demand from telecom and financial services, Mizuho analysts wrote in a note to clients. 

“This is consistent with our recent checks which indicated that cloud computing demand has meaningfully picked up in 4Q20 and is poised to accelerate in FY21,” they wrote. 

Google Cloud won several billion-dollar deals in 2020, while its deals over $250 million more than tripled and its partner network expanded. And Google’s backlog grew from $19 billion in Q3 to $30 billion in Q4, which was nearly all attributable to cloud and reflects success convincing large enterprises to sign long-term deals, Google CFO Ruth Porat said on Tuesday’s earnings call.

Read more: Google Cloud generated over $13 billion in revenue last year, but it’s not yet profitable

Analysts were encouraged by major customer wins, too. For example, Google announced a multiyear partnership with Ford to use its cloud and Android services, with Ford designating Google Cloud as its preferred cloud provider

Google Cloud has also won over customers like Highmark Health, Vodafone, Wayfair, and Etsy because of its “leadership in multi-cloud and cybersecurity,” William Blair analysts wrote in a note.

Google Cloud still trails far behind AWS and Microsoft though

Still, it would “take a miracle” for Google Cloud to catch up to AWS and Microsoft in the short-to-medium term, Dinsdale said. 

“The problem for Google is that it is a long way behind Microsoft, who in turn is a long way behind Amazon,” Dinsdale said. “Google is slowly nudging its market share upwards but it isn’t really making much impact on the two market leaders.”

Dinsdale expects Google Cloud to continue becoming “bigger and better,” but it will be “tremendously difficult to break out beyond number three in the pecking order for the foreseeable future.”

Google launched its cloud platform business in 2008, but did not focus on cloud infrastructure until more recently, while Amazon launched AWS in 2002. This later start contributes to Google Cloud’s market share deficit, Dinsdale said — Gartner pegs their respective shares at 5.3% and 45%.

“The absolute numbers are huge and the gaps are huge. But the thing is that the market is so big that Google Cloud can be very successful without ever catching up to AWS and Microsoft,” Dinsdale said. “Is Google happy to continue being the number 3 player? You’d have to ask them.”

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SEE ALSO: Google Cloud CEO Thomas Kurian has run the Oracle playbook for the last two years. Here’s how it’s going

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