Google Compute Engine Is Smart, Is It Time To Buy GOOG?

Google compute engine launch

The ‘next big thing’ in the cloud computing world was the general public availability of Google compute engine (GCE), Google’s (NASDAQ: GOOG) shot at IAAS (infrastructure as a service).

In the few days since its launch, a lot has been said and comparisons have been drawn with the major established IAAS service provider Amazon web services (AWS). Most of the technical comparisons have concluded that GCE is years ahead of where AWS was at its launch in 2006. We, at Amigobulls are convinced about the technical competence of GCE, having read a post by none other than Benjamin Black, the co-author of the first working papers on EC2 (Amazon web services infrastructure).

So why this furor over the GCE launch? Well the latest ace served by the online search giant has a competitive edge due to three major facts.

  • Its huge internet infrastructure is bigger than what most established players in the industry can currently put together. To put things in perspective, according to Benjamin Graham the GCE infrastructure is almost 50x bigger than AWS.
  • Commoditizing of the IAAS market through price cuts announced by Google.
  • The biggest competitor to Amazon web services, who until now was the undisputed king in IAAS.

The launch could be described as a disruptive move in the cloud computing industry and combining Google’s competitive edge with some other advantages Google will have could be a game changer for the California based giant.

What will help Google to succeed in the IAAS space?

  • Huge advertiser network which can be targeted for selling its IAAS service. More importantly Google also understands people in the online space better than most other people could manage to do.
  • Other than Amazon there aren’t other companies with financial muscle to match the search giant. In a commoditized market financial muscle could further competitive edge.
  • The Google infrastructure is vast compared to what some other established players in the cloud computing space have today, inspite of it being only a fraction of the infrastructure Google owns.

There have been a lot of reads comparing GCE to AWS. The one concern facing Google could be customer service, which it could learn from Rackspace, the best at that. We have more or less focussed on the technical aspects of GCE and will now move on to look at the financial implications of the new launch.

We shall look at how AWS has fared in the years since its launch and try to map out the road down which GCE could be headed over the next few years. For a start, AWS is expected to close in on a revenue figure close to $ 1 billion in Q4 2013, a surprising fact considering that Jeff Bezos and company still classify it as ‘other Revenue’ in the financials. While Bezos love for market share is widely known, the guy means business. So why do we say that?

AWS was launched in 2006. Amazon has traditionally seen razor thin margins. The major expenses over the last 10 years have been the R&D expenses, which have grown over 20X in the last 10 years. What Amazon did was a rebalancing act by investing to ramp up its internet infrastructure beyond its requirements with two benefits for the company.

  • One, the company had a new service which it could sell as IAAS due to the spare capacity available on its infrastructure.
  • Secondly, the investments to ramp up the internet infrastructure and associated services helped the company to show losses which offset any profits from the retail segment.

The move in hindsight is a smart move, considering that AWS has gone on to becoming the largest player in the cloud computing space. The service is closing in on quarterly revenue of $1 billion in Q4 2013, even though parent company Amazon still classifies it under ‘other revenue’ without giving out the exact details. The re-balancing act has today become a substantial contributor to Amazon’s topline with significant growth potential. However, the launch of GCE is something which could upset the growth trajectory of AWS by eating into the growing cloud computing market share. Let’s take a look at the current market for the IAAS service. The chart below displays the five year market value and growth rate of the IAAS market.

Infrastructure as a service (IAAS) market Value

Based on numbers from Gartner industry report and our estimates

According to the chart above, the current year estimate of the IAAS market stands at $9 billion and expected AWS revenues of $3.2 billion in 2013 account for 35.6% market share of the IAAS market. Now the fact that the market is commoditized will make prices of IAAS services an important factor to draw clients and gain market share. GCE has undercut Amazon and Azure in its pricing, and this combined with its up to date service could help it grow rapidly and generate significant revenues. According to reports, Google cloud (including Google apps) has been gaining adoption among enterprises and the availability of Google compute will only speed up the adoption rate. The cloud services is expected to net the company close to $1 billion in 2013 alone, according to a report by TBR (Technology Business Research). While the net addition of Google Compute Engine to the company’s revenues is still unclear, a 15% market share in 2015 could result in revenues in excess of $3 billion, which would be a significant addition to the company’s revenues.

Google seems to have made the right move with the launch of GCE, and this strengthens our long term positive outlook on the stock. We won’t be surprised if the GCE grows into a significant growth driver for Google over the coming years. The stock has been among our top picks for over 7 months now, netting our readers a neat 21%. This is just one among our top stock picks, which are essentially long term picks based on strong fundamentals. You can view our other top stock picks here.

To see Google’s latest stock price movement, click here (NASDAQ: GOOG)

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Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions. Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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Comments on this article and GOOGL stock

Given Google's penchant for data mining, customers will be wary of placing sensitive information in an infrastructure that makes it easy for Google.. Google privacy Policy for Google Cloud clearly states that they can use information they collect from you for advertising purposes. Winning a customers trust might not be that easy for Google... in addition to the fact that it has never been known to be an serious enterprise level player!
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