Google Cloud Surges Toward Profitability, Propelled by Hypergrowth

While Google Cloud did indeed lose $5.61 billion in calendar 2020, the high-flying cloud provider is rapidly narrowing its losses and stands an excellent chance of becoming profitable by this time next year.

Driven by revenue hypergrowth averaging 46.4% over the past 5 quarters, Google Cloud is #3 on my weekly Cloud Wars Top 10 rankings behind #1 Microsoft and #2 Amazon.

Before exploring my profitability premise, let’s acknowledge a couple of things: in calendar 2020, Google Cloud lost $5.61 billion on revenue of $13.1 billion. Seen in isolation, that’s a very ugly combination, with full-year losses equaling 43% of revenue. So for every dollar of 2020 revenue, Google Cloud lost 43 cents. 

And with no context, that combo is so ugly that earlier this year some misguided reporter cooked up some daffy theory about how Alphabet’s top execs were threatening to shut Google Cloud down (I’m deliberately not linking to such baseless stuff, but you’ve probably heard someone hyperventilating about it).

But when Google Cloud’s performance is viewed in the proper context and with some perspective, the company’s financial picture is actually extremely impressive and points aggressively to Thomas Kurian and his team reaching breakeven within the next 12 months.

And by the middle of next year when that profitability is likely to hit, Google Cloud will probably have trailing 12-month revenue of about $20 billion.

Here’s why I believe—in spite of the 2020 loss of $5.61 billion—that Google Cloud’s breakeven point is imminent. 

1. Quarterly losses are shrinking in terms of absolute dollars and as a percentage of revenue.

• Q1 2020: on revenue of $2.78 billion, loss of $1.73 billion, equaling a whopping 62% of revenue
• Q2 2020: on revenue of $3.01 billion, loss of $1.43 billion, equaling 48% of revenue
• Q3 2020: on revenue of $3.44 billion, loss of $1.21 billion, equaling 35% of revenue
• Q4 2020: on revenue of $3.83 billion, loss of $1.24 billion, equaling 32% of revenue
• Q1 2021: on revenue of $4.05 billion, loss of $974 million, equaling 24% of revenue

2. Revenue is growing at hyperscale—and has frequently risen—enabling Google Cloud to not only grab big chunks of market share but also drive huge economies of scale.

• Q1 2020: revenue growth of 51.9%
• Q2 2020: revenue growth of 43.3%
• Q3 2020: revenue growth of 44.6%
• Q4 2020: revenue growth of 46.7%
• Q1 2021: revenue growth of 45.7%

3. Alphabet’s CFO has been extremely bullish on Google Cloud’s performance and on Alphabet’s eagerness to continue to invest aggressively in the face of an enormous market opportunity.

Here’s an excerpt from my May 7 analysis called Google Cloud Hypergrowth Triggers More Billions from Alphabet that makes the parent company’s bullishness unmistakably clear:

During Alphabet’s Q1 earnings call last week, CFO Ruth Porat said, “As for Google Cloud, our approach to building the business has not changed. We remain focused on revenue growth and we will continue to invest aggressively in products and our go-to-market organization, given the opportunity we see.”

That is precisely what Porat and Alphabet CEO Sundar Pichai have been saying for the past few quarters, and it’s a point Porat reiterated a few times later in the earnings call. Are we seeing a consistent theme here or what?

• “We do remain focused on continuing to invest to build the cloud organization for long-term performance…” 
• “We do intend to continue to invest meaningfully in cloud given the opportunity.”
• “So, the main takeaway is we’re continuing to invest. We’ll invest aggressively in products and go-to-market…”
• “At this point, we do remain focused on investing to build the organization for long-term performance.”

What will Q2 look like for Google Cloud?

So based on the what I’m hearing in the market and what the trend lines spelled out above indicate, here’s my guess for the numbers Alphabet will release for Google Cloud on July 27: revenue up 44% to $4.31 billion, with a loss of $645 million, which equates to about 15% of revenue.

And here’s a final point: in the vast and far-flung reaches of Alphabet’s businesses, moonshots and experiments, Google Cloud has pushed itself to getting top-level billing in how the company reports its financial results: “Beginning in the fourth quarter of 2020, we report our segment results as Google Services, Google Cloud, and Other Bets,” the company wrote on p. 9 of its press release for Q4 2020.

And that, my Cloud Wars friends, is as strong a commitment as Google Cloud could wish to see.

Disclosure: at the time of this writing, Google Cloud was among the many clients of Cloud Wars Media LLC and/or Evans Strategic Communications LLC.

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