While Google Cloud grew a whopping 28.4% to $9.6 billion in Q1, Alphabet CEO Sundar Pichai believes his cloud unit’s growth will accelerate throughout the year based on his suggestion that Google Cloud revenue will reach $12.5 billion in Q4, which would require a growth rate of 36%.
Over the past year, Google Cloud has leveraged its strengths across AI, infrastructure, databases and analytics, and cybersecurity to become the world’s fastest-growing major cloud provider.
But Pichai seems to want to indicate that the best is yet to come.
In his opening remarks on Alphabet’s Q1 earnings call last week, Pichai made what was for him a rare forward-looking projection, and within it he showcased two of Alphabet’s fastest-growing businesses: Google Cloud and YouTube Ads.
Here’s the full comment from Pichai, and then we’ll look at the numbers underpinning his projection.
“In just the last six years, we’ve gone from $100 billion to more than $300 billion in annual revenue,” Pichai said early in his opening remarks in a clear attempt to hammer home his company’s position as a big-time growth player.
“Of course, Search continues to power that, as you see in our Q1 results. But in addition, we expect YouTube overall and Cloud to exit 2024 at a combined annual run rate of over $100 billion.”
Here’s where that projection gets particularly interesting, and why I believe it was Pichai’s attempt to suggest that a major growth spurt is looming for Google Cloud. Let’s take it step by step to see what’s required to hit his vision of “a combined annual run rate of over $100 billion“:
- For those two businesses to reach the combined Q4 run rate of $100 billion expected by Pichai, they’ll have to generate a total of $25 billion in Q4 revenue, or $12.5 billion each.
- That opening step implies the businesses are the same size — but in fact they’re not. In Q1, Google Cloud’s revenue was about $9.6 billion, while YouTube Ads revenue was about $8.1 billion. Plus, Google Cloud is growing much faster: 28% to 21%.
- So unless both of those ratios — for revenue and for growth rates — change dramatically over the next three quarters, then Google Cloud will have to carry more than a 50-50 split for the two business units to reach total combined Q4 revenue of $25 billion.
- But for a moment, let’s stick with the 50-50 ratio, which would require Google Cloud to generate $12.5 billion in Q4 revenue. In Q4 of 2023, Google Cloud revenue was $9.2 billion. So cranking up that year-ago Q4 revenue of $9.2 billion to $12.5 billion for Q4 of this year would require a growth rate of 36%: $9.2 billion x 1.36 = $12.51 billion.
- So unless Alphabet is expecting its YouTube Ads business to go on a growth tear for the rest of the year with revenue soaring more than 50% from Q1’s $8.1 billion to the Q4 target of $12.5 billion, then it will be up to Google Cloud to continue generating the lion’s share for the combo and reach the stretch goal outlined above.
But nothing I heard or read about on the Alphabet earnings call hinted at a forthcoming blowout for the YouTube Ads business. And I’ll mention once again that on Alphabet’s earnings calls, Pichai almost never makes exuberant remarks of any kind.
In a similar vein, during the Q&A session of the call, CFO Ruth Porat — whose remarks on earnings calls, like those of Pichai, always reflect an abundance of caution — did her very best to pooh-pooh the $100-billion stretch goal set by Pichai when asked by a financial analyst to describe what needs to happen for that goal to be reached.
Here’s the question from the analyst, and then Porat’s reply.
“In terms of your comment about a $100 billion exit rate for YouTube and Cloud, what’s driving this visibility for you? And any kind of inflection you are seeing in the Cloud demand,” the analyst asked.
“I would just say from Sundar’s opening comments, it’s just the ongoing momentum that we’ve seen in the business that we’ve been talking about the ongoing growth, the strong performance,” Porat said.
“And so what we were really getting at in that comment, what Sundar was getting at is that we’ve continued to build strong businesses over time, and that just helps dimension it. We had similar comments last quarter when you talk about our Subscriptions business. We’re really proud of all the work that teams are doing across the company, building new, strong opportunities, delivering for our users, for customers, for advertisers in profound ways. And so it was just helping to dimension what we had built over the years.”
Final Thought
With all due respect to Ruth Porat, various companies have been able to “build strong businesses over time,” but that’s not the same as having the CEO project remarkable growth rates of 36% or so. No, I think Pichai offered a peek under the covers of what he’s expecting from Thomas Kurian’s Google Cloud unit for the rest of the year.
And for the sake of argument, let’s say Google Cloud’s Q4 growth rate comes in at “only” 30% instead of in the gaudy range of 36%.
A 30% growth rate would mean Q4 Google Cloud revenue of $12 billion and an extended run as the fastest-growing provider in the world-shaping AI and Cloud Wars. But is Sundar Pichai hinting that we should expect even more from Kurian & Co.?
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