Alphabet (GOOGL) shareholders had a really bad day Tuesday.
Stock traders and analysts blame a shortfall in Alphabet’s first-quarter advertising revenues. But all this selling is short-sighted.
The Mountain View, Calif., company has always been an accidental ad seller. Its real business is machine learning. And now — at long last — there is a viable, growing market for that skill set.
The point of inflection is near, and investors should buy this dip.
Javier Polit is not a household name. He’s the chief information officer at Procter & Gamble (PG), the maker of brands ranging from Tide laundry detergent and Bounty paper towels, to Gillette razors and Old Spice. His job is to find ways to secure, organize and manipulate the vast amounts of data the company collects to make the business more profitable.
He was speaking at the eMerge Americas conference Monday. Talking about the red-hot cloud computing market, Polit told a story very much outside the current mainstream narrative.
A report from Canalys in February showed the $80 billion market for cloud infrastructure is currently dominated by Amazon Web Services. The Amazon.com (AMZN) subsidiary commands 32% market share. Microsoft (MSFT) unit Azure takes 16%, and Alphabet’s Google Cloud is a distant third, with only 9% share.
For now, anyway …
Polit told reporters that P&G has investments with AWS, Azure, SAP (SAP), Dell Technologies (DELL) and Google Cloud. However, betting across several clouds is expensive. And pushing data between platforms creates friction.
The strategy is at a crossroads. The company needs to prioritize what investments will best advance its digital transformation.
That directive comes from the top. CEO Robert McDonald told McKinsey & Co. that he’s on a mission to make the consumer products giant the world’s most technologically enabled company.
Jargon aside, McDonald wants to use AI to inform everything from how the company creates molecules for soaps and lotions, to how it interacts with customers.
He also wants to use data to find business models that might not otherwise be obvious.
Only one leading cloud infrastructure company has its roots in machine learning and AI. And that’s Alphabet.
Google, as a company, began as a grad project in the halls of Stanford in 1998. Founders Larry Page and Sergey Brin had the bright idea they could design algorithms to manage the world’s public information more effectively.
As a way to navigate the web, Google came out of nowhere. Unlike Yahoo!, Lycos and Alta Vista, the popular search engines at the time, it used math that prioritized how often internet pages were linked.
PageRank was never intended to be the basis for the biggest advertising platform the world the world has ever known. Hawking ads paid the bills. Google began as a math problem for curious grad students. It was refined with algorithms, massive amounts of data and computer power.
Teaching computers to learn and provide insights using data is what Google does.
Then, in 2014, the company acquired DeepMind Technologies, a British AI startup that was making progress teaching computers the quirks of human short-term memory.
A few years later, its custom AlphaGo code was so advanced that it became the first computer program to defeat a human in a match of Go, the ancient Chinese strategy game.
Go is renowned among computer scientists because it stretches the limits of human general intelligence. AlphaGo defeated Lee Sedol, the 18-time Go world champion, 4-1.
Now Alphabet is making a pitch to enterprises. Managers at Google Cloud want to use the corporate pedigree, and undisputed AI leadership, to help companies build new business models using data analytics and AI. You can see how that might appeal to large enterprises struggling to stay one step ahead of the next Amazon.com.
Google Cloud replaced Diane Greene with Amit Zavery as chief executive officer in November 2018. Zavery, a top ex-Oracle product manager, is a nuts-and-bolts sales guy. He has been aggressively building out a sales operation to court enterprise CIOs.
It all fits with Polit’s view from inside P&G. The company signed its first deal with Google Cloud in early April. However, Polit says P&G’s cloud spend could shift more toward Google over the next 18-24 months as data mining begins to play a bigger role in the future of the business.
At this stage, Google Cloud is not a material part of Alphabet’s business. Its specific numbers are mixed with “other” sales in the company regulatory filings.
However, the future is bright. After two decades, Alphabet finally has another use case for its core skillset in machine learning and AI.
Alphabet shares got smashed Tuesday, losing 7.5% on the revenue shortfall. And Wednesday saw the stock lose another roughly 2% despite general positivity in the broad market after the release of new data showing strong private-sector hiring in April, a handful of upbeat earnings reports, and the Fed leaving interest rates unchanged.
Shares now trade at 21.9x forward earnings. Given the resilience of Alphabet’s core advertising business, and the bright longer-term prospects for its cloud business, this is cheap.
Based on high-teens sales growth, this stock could trade to the $1,400 level in two years. At their current price of $1,175, that’s a nice 20% potential increase for a stock with a four-digit price tag.
Investors should consider using this period of momentary weakness to take positions.
Jon D. Markman