Cloud Investments a Drag on Earnings for Google, Microsoft
Big bets on cloud computing initiatives appear to be dragging down the near-term earnings of a couple of tech giants.
Microsoft and Google parent, Alphabet Inc., reported earnings that left Wall Street underwhelmed Thursday, and analysts suggested the cloud businesses were at least partly to blame for the sluggish performance.
To be clear, both companies appear in excellent health and neither showed any sign of taking its foot off the gas in the race for cloud computing dominance.
As with any bet, the companies expect the investments to pay off handsomely in the long run.
Microsoft’s Intelligent Cloud segment, which includes the Azure cloud platform, saw a gain of 8 percent in constant currency, with Azure growing 120 percent in constant currency, the Wall Street Journal reported.
In the previous quarter, constant currency grew by 11 percent, with Azure sales rising 140 percent.
“That’s deceleration for sure,” Pacific Crest Securities analyst Brendan Barnicle told the Wall Street Journal.
As a result, Microsoft profit came in at 62 cents per-share, missing analyst estimates by 2 cents and sending shares 5.5 percent lower in after-hours trading, to $52.70.
The impact of Google Cloud Platform on Alphabet’s earnings is tougher to specifically discern, as it is included among an aggregated 27 percent increase in spending, compared to the same quarter a year ago.
Spending was $285 million higher than analysts expected, and CFO Ruth Porat attributed the rise vaguely to “fall hardware launches and two businesses Google sees at major potential growth areas,” according to MarketWatch.
“Porat cited ‘costs associated with operating our data centers including depreciation,’” MarketWatch reported.
In addition, Google chief executive Sundar Pichai said the unit’s machine learning artificial intelligence initiative, an integral component of the cloud effort, is on-track to become a “huge source of differentiation.”
Machine learning is about “helping enterprises really understand their data, understand how best they can do it, what their core competency is and really revolutionize around that,” Pichai said, according to MarketWatch.
Amazon Web Services currently leads the war for cloud, with a 31 percent share of the public cloud market, according to a recent USA Today article, citing a Synergy Research Group study.
That same study found Microsoft’s Azure owns 9 percent of the market, while Google trailed at 4 percent. IBM and Salesforce are also players, with 7 and 4 percent market share, respectively.
Last month, Google announced a major push to increase its share of the public cloud market.
In addition to $9.9 billion cloud-related investment during the past year alone, Google officials said they’ll add to their three existing data centers by opening new facilities in Oregon and Tokyo by the end of 2016, and 10 more by the end of 2017.
A Gartner study calculated that cloud spending last year reached $175 billion and is expected to surpass $315 billion by 2019, USA today reported.
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