Google Downplays Microsoft Cloud Potential Versus Wall Street; Analyst Disagrees

Alphabet Inc GOOG GOOGL Google has for years struggled to improve its position in the cloud market versus leaders like Amazon.com Inc AMZN and Microsoft Corp MSFT.

An internal estimate by Google, from a leaked Microsoft document and some extrapolation of other market statistics, indicated Google Cloud believes it’s closer to second place than analysts think, CNBC reports.

Google estimated that Microsoft generated under $29 billion in Azure consumption revenue in the latest fiscal year, reflecting the value of cloud infrastructure services used by clients, trailing the Wall Street consensus by several billion dollars. 

Bank of America predicted Azure would pull in $37.5 billion in fiscal 2022. Cowen predicted revenue of $33.9 billion, and UBS said $32.3 billion.

Google estimated Azure ending the FY22 with an operating loss of $(3) billion, down from a loss of more than $(5) billion the prior year.

Google said Azure’s sales and marketing costs accounted for 34% of consumption revenue. Microsoft said sales and marketing costs for the whole company equaled 11% of revenue over the same period.

“There’s no way it’s that big of a loss,” Cowen analyst Derrick Wood said. His research shows Azure boasting an operating margin above 30%, compared with Google’s estimate of a (10)% margin loss.

AWS recorded an operating margin of 26% in the third quarter, while Google’s cloud group reported an operating margin loss of -(10)%.

According to Gartner, AWS controlled 39% of the global cloud infrastructure market in 2021, followed by Microsoft at 21%, China’s Alibaba Group Holding Limited BABA at 9.5%, and Google at 7.1%.

Google and Microsoft invested heavily to prevent Amazon Web Services from dominating the market it pioneered in 2006.

If Google is right, Microsoft’s Azure consumption revenue (ACR) would be about 40% the size of Amazon’s AWS business and 27% larger than Google’s cloud business.

Google’s calculations suggest that ACR is the primary source of revenue for Azure and other cloud services.

Google made a series of assumptions based on the leaked ACR information.

None of the three U.S. market leaders disclosed gross margins for their cloud groups.

Cowen expects the broader Azure and other cloud services group to account for 27% of Microsoft’s revenue in FY23. He says Microsoft could clarify things by providing a more granular breakdown.

Photo by Rainer Stropek via Flickr