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Alphabet Gears Up to Give Amazon’s AWS a Tough Fight

Posted on Wednesday, Nov 2nd 2016

cloudfront

After capturing the search market, Alphabet (Nasdaq: GOOG) now appears to have set its eyes on the cloud services market. While rival Amazon may be the market leader, Alphabet appears to be focused on eating into its market share.

Alphabet’s Financials

Alphabet’s third quarter adjusted revenues grew 20% over the year to $22.45 billion, ahead of the Street’s forecast of $22 billion. On a constant currency basis, revenues would have recorded a 23% growth over the year. EPS of $9.06 was also better than analyst estimate of $8.60 for the quarter.

By segment, revenues from advertising grew 18% to $19.82 billion driven by a 23% growth in revenues from Google’s websites. Google’s websites revenues came in at $16.09 billion and revenues from its Member’s websites grew 1% to $3.73 billion. Other revenues grew 39% over the year to $2.43 billion. Google’s moonshot segment, referred to as Other Bets, saw revenues grow 40% over the quarter to $197 million. The losses in the segment appear to be slowing down. A quarter ago, Google had reported losses of $980 million in the segment compared with net losses of $865 million in the reported quarter.

Among operating metrics, aggregate paid clicks grew 33% over the year and 9% sequentially. Paid clicks grew 42% over the year on Google websites and 1% over the year on member’s websites. Aggregate cost per click fell 11%. It recorded a 13% drop on Google’s own sites and a 14% drop on member’s websites.

Last month, Alphabet announced plans to buy back more than $7 billion of shares.

Alphabet Improves Cloud Focus

During the last quarter, other revenues for Alphabet grew by 39% over the year primarily due to the increased adoption of its Cloud business. According to Gartner, the global cloud services market is estimated to be worth $208.6 billion this year. Amazon is the market leader in the space with 31% share. Alphabet came in a distant fourth with 4% market share. But Alphabet is working hard to change that. Earlier this year, Alphabet earned a major victory when Apple became its customer for the cloud offering.

To improve its cloud services, Alphabet began first through a reorganization to set up a separate cloud division to support its entire gamut of cloud offerings, including products for both consumers and enterprise customers. As one of its first steps, the group is rebranding its cloud-based productivity toolkit to “G Suite” and also adding machine learning features that will simplify navigation. It is also investing in infrastructure. Besides spending on undersea cables, Alphabet is opening eight new data centers around the world to make its services more accessible.

Some of the recently added features introduced in Google’s Cloud capabilities include an enhanced media conference experience in Google Hangouts that has a better user interface, instant screen sharing, and support for as many as 50 participants. Google has also integrated it seamlessly with the Calendar. Alphabet also upgraded Google BigQuery, its fully managed data analytics warehouse, and made Google Cloud Machine Learning available in beta to help businesses train quality machine learning models.

Machine learning is proving to be a big advantage for Google Cloud, as it is able to drive improvements within the enterprise customers. Recently, the service was leveraged by Ocado, a leading online-only grocery retailer which is deploying machine learning in its support center organization to categorize and prioritize customer emails to improve the speed of response.

It will still be a long battle for Alphabet to overtake Amazon’s massive lead. For now though, it appears to be taking the right steps.

Alphabet’s Assistant

Additionally, Alphabet continues to enhance and build new offerings focused on consumer products. Recently it released Google Assistant integrated in its products like the Pixel, Google Home, and Allo. Google Assistant is a voice enabled service that allows a user to type or talk with Google in a natural conversational way to help get things done regardless of the device they are using. It was first introduced in its smart messaging app Allo. Alphabet allows you to add Assistant to a group conversation to help users and their friends decide where to go for dinner. Assistant is also core to the Pixel phone and Google Home. Within Google Home, Assistant allows users to do basic stuff like casting a song on a device or turning on lights. Within its Pixel users can use the Assistant to send a text to a contact or pull up pictures of a subject in Google Photos.

Alphabet’s stock is currently trading at $775.50 with a market capitalization of $540 billion.  It touched a record high of $816.68 last month. It had fallen to a 52-week low of $663.06 in February this year.

Photo credit: Francis Vallance (Heritage Warrior)/Flickr.com.

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