Bernstein analysts believe that Google’s stock is now heavily influenced by the performance of its cloud business. This is the third consecutive quarter where stock movements have closely followed how Google Cloud performs compared to expectations. While a 30% year-over-year growth is still impressive, the slowdown from the previous quarter was sharper than investors had hoped. This also raises concerns about Google Cloud’s ability to gain market share against AWS and Azure.
On the positive side, Google Cloud’s growth has been driven by new customer acquisitions, particularly for AI-related infrastructure. The company has secured several billion-dollar deals this year, and usage of its AI platform, Vertex AI, has surged 20 times. Profit margins also improved slightly from 17% to 18% due to price adjustments and operational efficiency. However, further margin growth could be limited as Google continues to invest heavily in AI, leading to higher depreciation costs.
Beyond the cloud business, Google faces other challenges. Concerns over competition in search, as well as two recent legal verdicts against its Search and Play Store practices, are keeping the company’s valuation in check. Another lawsuit related to its ad network could also go against Google.While Bernstein has slightly raised its Google Cloud revenue estimates due to a price increase for Workspace subscriptions (which took effect in mid-March), they have kept their overall stock price target unchanged and maintained a “Market Perform” rating.
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