Alphabet (GOOG 0.20%) (GOOGL 0.17%) is best known as the parent company of massive search platform Google. The Google search business has a dominant share of its market, and there's also the popular Gmail, Google Maps, Chrome, Android, and Google Play products that are a part of the Google ecosystem as well. There's also YouTube. Collectively, all of these are known as the Google Services segment of the business.
The bulk of the revenue from Google Services comes from advertising, although there are some non-ad revenue streams as well. For example, Google sells smart home products under its Nest brand, YouTube has premium subscription offerings, and the company gets income from Google Play in-app purchases. In all, Google Services makes up nearly 90% of the company's revenue.
The other major segment of the business is Google Cloud. This is the side of the business that provides collaboration tools and cloud infrastructure, primarily for enterprises. Google Cloud mainly generates subscription revenue and is a relatively small piece of the business when compared with the massive Google Services segment, making up roughly 10% of the revenue.
Alphabet makes its money in a few other ways, such as its "other bets" segment, which includes several promising start-ups, such as the Waymo self-driving vehicle business. However, these are (for the most part) pre-revenue and aren't reflected in the company's current sales.
This graphic breaks down Alphabet's various revenue streams:
Google Cloud could be the most important part of the thesis
As you can see from the graphic, Google Cloud makes up just under 10% of Alphabet's revenue today, but it's important for investors not to overlook it when assessing the company's future potential. The cloud business is by far the fastest-growing major component of Alphabet, and could be just getting started.
For one thing, the cloud services market is estimated to be about $480 billion in size today, and Alphabet's annualized Google Cloud revenue gives it about 6% of it. So, there's plenty of room to grow its market share, and it appears that's exactly what is happening. In fact, in the third quarter of 2022, Google Cloud was the only one of the top three players (the others being Amazon's AWS and Microsoft Azure) to grow its market share sequentially.
In addition, not only is the cloud services market massive today, but it's growing rapidly. It is expected to reach $1.7 trillion by 2029, so even if Google Cloud simply maintains its market share, this high-margin component of Alphabet's business could more than triple in the next six years.
What it means to investors
If the cloud services market grows as expected in the coming years and Google Cloud can double its market share -- which is entirely possible -- it could become about the same size of a revenue stream as Google Search advertising is today. Now, there's a lot that would need to go well for Google Cloud to get that big, but the point is that it would be a mistake to dismiss Alphabet as a high-growth investment opportunity simply because its core business is relatively mature.
