By Munsif Vengattil and Paresh Dave
(Reuters) – Alphabet Inc will report the cost and operating profit of its Google Cloud business for the first time on Tuesday, disclosures that are expected to overshadow record overall quarterly sales for the internet’s biggest platform for ads.
The transparency marks a milestone after years of aggressive investment and comes as the COVID-19 pandemic is pushing more work, shopping and entertainment online.
That drives the ad business Google dominates over rivals Facebook Inc and Amazon.com Inc, and it also has created a surge in demand for both parts of Google’s cloud business: computing services for retailers and other companies and corporate productivity suites including tools like Gmail.
JPMorgan & Chase Co analysts, among the few to make predictions about Google Cloud, estimate the unit’s 2020 operating margin at 2%. Bank of America analysts estimate an unspecified operating loss.
By comparison, Amazon’s Web Services, the top cloud vendor by sales, posted third-quarter operating margin of 30.5% and $3.5 billion in operating income.
Microsoft’s Azure, the industry No. 2, does not report comparable figures.
Google got serious about the cloud around 2016, five years after Amazon’s unit had become a multibillion-dollar behemoth. But some analysts say Google may be ready to show that its heavy investment in staff and data centers to catch up in the industry is finally paying off.
Alphabet’s costs have been an increasing concern for Wall Street as sales growth from the advertising business flattens out.
The company started disclosing Cloud and YouTube sales a year ago. Alphabet will provide a detailed annual breakdown for Cloud going back three years.
Wall Street analysts forecast fourth-quarter Cloud sales of $3.82 billion for Google, with expectations for the unit to cross $13 billion in annual sales, according to Refinitiv data.
The JPMorgan analysts estimate Google Cloud spent about 40% more in 2020 than Amazon’s cloud unit did in 2016, when it had about $12 billion in sales. Google’s spending reflects higher competition, as well as cloud vendors expanding into newer technologies.
Analysts expect Google’s advertising business will post $42.6 billion in fourth-quarter sales, pushing overall Alphabet quarterly revenue to $53 billion. That would leave Alphabet with 2020 sales of $179 billion and profit of $11 billion.
(Reporting by Munsif Vengattil in Bengaluru and Paresh Dave in Oakland, Calif.; Editing by Matthew Lewis)
