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CLOUDY FUTURE

The one number to look for in Alphabet’s earnings to understand its future

By Mike Murphy

Later today, Alphabet will report its first-quarter earnings, and there’s one number in particular that investors should focus on for a glimpse of the company’s near-term future. It’s not Google’s advertising business (likely as strong as ever), nor will it be one of its ”moonshot” ideas. It will be the revenue from the company’s burgeoning cloud services business.

While not quite as exciting as self-driving cars, internet-beaming balloons, or smartphone sales, Google’s future lies in its ability to turn the cloud into a revenue-generating machine. Even as large as Google’s advertising business is, companies whose entire business hinges on a single revenue source don’t tend to stay at the top—look at IBM in the PC business, or Apple’s attempts to diversify beyond the iPhone.

At a recent conference about its cloud business, Alphabet executive chairman Eric Schmidt explained that Google’s AI prowess could help set its cloud offerings apart from other storage offerings, such as Amazon’s AWS or Microsoft’s Azure—both of whom are also reporting their earnings today.

Artificial intelligence pervades just about every aspect of Google’s core business, even powering its search engine. If Google can convince businesses that they would benefit from not only storing data in Google’s cloud, but also being able to understand and analyze it with the help of Google’s AI, then it might have a shot at becoming as dominant in storage as it has in search.

Google’s pitch will also include ease of use: In the same way that it made online advertising relatively easy for any mom-and-pop business, it will likely offer small businesses the ability to store information about themselves, their customers, and their operations, in the cloud without the usual expensive capital investments in storage and IT management.

Google’s cloud revenue is still just a tiny fraction of the company’s revenue—it brought in about $10 billion in non-advertising revenue in 2016, about eight times less than its advertising revenue—but the revenue is slowly increasing, and accounting for a greater percentage of Alphabet’s revenue. In 2015, Google’s non-advertising revenue accounted for 9.6% of the Alphabet’s revenue, and in 2016 it was 11.3% of total revenue.

Google’s cloud offering still has a long way to go to catch up to its advertising business, but look for signs in today’s earnings report that the cloud is becoming a viable new business line for Alphabet. It’s also possible that we’ll hear more about the recent addition of a new high-profile client, Snap, the company behind Snapchat. In its IPO filings in February, Snap unveiled that it had chosen Google’s cloud, over Amazon or any other provider, to handle Snapchat’s computing and storage needs, for a cool $2 billion.

Google will need to win more businesses like Snap if it’s going to compete in the cloud, but it’s already a solid first step toward securing Alphabet’s financial future—at least until one of its moonshots begins to pay off.