Why Google Can Be the Best Performing Tech Stock of 2021
Hint: It has to do with the cloud
Google does everything. Just click on the nine dots in the top right corner on google.com to show the apps they offer. But the company’s executives have recently made a subtle, yet huge move.
On Google’s 2019 10-K (their annual earnings report) they broke out their revenue streams to include their cloud business. And in their 2020 Q3 10-Q (their quarterly earnings report) they announced they will break out Google Cloud as a separate segment.
You’re probably thinking, “So what? What's the big deal?”
Cloud Computing Industry
The big deal is investors see cloud computing businesses as a cash cow.
The cloud computing industry is already huge. But it’s not showing any signs of slowing down; just the opposite. Research and Markets, a leading market research firm, believes “The global cloud computing market size is expected to grow from USD 371.4 billion in 2020 to USD 832.1 billion by 2025, at a Compound Annual Growth Rate (CAGR) of 17.5%”
The industry, though, won’t be easy to jump in and make money from. In 2019, market share looked like this:
- Amazon — 45% of the industry
- Microsoft — 18%
- Google — 5%
While Google may not be one of the top dogs yet, their 2020 Q3 10-Q showed cloud revenue up 45% from a year ago, which is better growth than Amazon Web Services (up 29%) and close to Microsoft Azure (up 48%).
Why It’s Meaningful
Amazon’s stock is a beast. It has been for a while now. They broke out AWS as a separate revenue line in 2015 and since then their stock has gone from the $400 range to $3,200. Not a bad return for six years.
Most people know Amazon for its online shopping, but it's their cloud service that investors love the company for. AWS has been the driving force for Amazon’s stock in the past few years.
Now Google is taking a play from their book. In its most recent 10-Q, Google announced
Starting in the quarter ending December 31, 2020 we will disclose Google Cloud as a separate segment.
This sends a sign to investors. Google is telling people they will be a serious player in this space. It doesn’t matter that Amazon and Microsoft are established giants, Google isn’t going anywhere.
Google will now show revenues, cost of revenues, and operating income (or losses) for its cloud business. By making this information public, they can’t work on it behind the scene with no repercussions for lack of success. Now their profit (or loss) for this segment will be front and center for investors to scrutinize.
Google is also hoping that doing this will show how much they have invested in cloud computing. This should help separate them from smaller cloud competitors.
Moral of the story: Be on the lookout for Google. They had a good 2020 but lagged behind the other FAANG stocks. I can’t predict how their stock will perform in 2021, but I’m excited to see them make moves in the cloud computing industry.
