Is Google Cloud Falling Further Behind the Competition?

Cloud-computing is one of the fastest-growing industries in the world of technology. The industry is set to double in size between 2017 and 2021, according to estimates from Gartner.

Google may have gotten a late start compared to Amazon (AMZN 0.78%) and Microsoft (MSFT 0.25%), but Alphabet (GOOG +0.48%) (GOOGL +0.56%) CFO Ruth Porat told investors last year that Google Cloud Platform grew faster than any other cloud-computing provider in the world in 2017.

However, despite heavy investments in cloud infrastructure last year, Porat didn't have as many details to share with investors recently. Even when asked point-blank on Alphabet's fourth-quarter earnings call whether she could compare growth to the company's competitors, Porat dodged the question.

Image source: Getty Images.

A look at the competition

Google's two biggest competitors in the public cloud space are Amazon's Amazon Web Services and Microsoft's Azure. Both continued to see excellent growth over the last four quarters.

Data sources: Amazon and Microsoft. *Constant currency basis. 

Microsoft CFO Amy Hood called out an increase in larger long-term contracts as the main thing driving continued growth in Azure, and she doesn't see that growth slowing down significantly any time soon. Microsoft won significant contracts with retail companies (who don't want to work with Amazon for some reason). It also won big contracts in financial services and healthcare (two more areas Amazon has expressed interest in entering).

Amazon announced new contracts across industries including financial services, sports leagues, and airlines, among others. It also highlighted the progress of its SageMaker RL machine-learning platform. Google often sells itself as the best cloud provider for machine-learning projects due to its own businesses relying on the infrastructure for their AI algorithms.

Is Google falling behind?

Porat also highlighted some of the big wins for Google Cloud in 2018. It signed on big-name financial institutions, retailers, and media companies to use its cloud. Overall, it doubled the number of $1 million-plus contracts as well as the number of multiyear contracts. Last year, Porat told investors the number of $1 million-plus contracts tripled in 2017.

However, when it comes to disclosing any of the financials, Porat and Google CEO Sundar Pichai were quiet.

Last year, Porat announced Google Cloud surpassed $1 billion per quarter and was growing faster than the competition. This year, all she could say was, "Cloud does continue to deliver a sizable revenue growth, driven by [Google Cloud Platform]. And [Google Cloud Platform] does remain one of the fastest growing businesses across Alphabet."

Big investments tell a story

While Porat and Pichai were quiet about specific financial details, the growth in Google's capital expenses indicate the company is either growing quickly or expects to do so in the future.

Google doubled its capital expenditures for the year, spending $25.5 billion over the last 12 months. A large portion of that CapEx went to data centers and servers, according to Porat. That said, she expects the growth rate to slow meaningfully this year.

Amazon saw similar growth in investments in data centers and servers in 2016 and 2017 before pulling back on spending in 2018. Capital expenditures increased just 17% for Amazon in the fourth quarter, and capital leases increased just 10%. Nonetheless, Amazon Web Services continues its steady growth, so investment rates aren't exactly tied to revenue growth. "2018 was about banking the efficiencies of investments in people, warehouses, infrastructure, that we had put in place in 2016 and 2017," Amazon CFO Brian Olsavsky said on the company's fourth-quarter earnings call.

The massive growth in capital expenditures at Google is a sign that Google's cloud business is still growing strongly. A pullback in that spending this year is not an indication that the outlook for the business has changed, but rather evidence that Google could be working to gain efficiencies in the cloud business.

Check out the latest Alphabet earnings call transcript.

The lack of details about the Google Cloud Platform compared to the competition is concerning, but the company's investments in the business should mitigate those concerns for long-term investors. Google is still an integral player in a rapidly growing market, and its massive investments in cloud infrastructure in 2018 prepare it to capitalize on the opportunity in 2019 and beyond.