Best Cloud Computing Stock: IBM vs. Alphabet
As tech stocks got hammered in 2022, the cloud computing industry spun at an impressive rate of growth. According to the research firm Gartnerthe public cloud industry alone is expected to grow 20% this year.
That’s nearly half a trillion dollars in 2022. Just a decade ago, global public cloud computing revenues were just $26.4 billion.
Given the rapid expansion of the cloud industry, there is no shortage of competitors. Among the biggest players are the tech giants IBM (IBM 2.77%) and Google Cloud, owned by Alphabet (GOOGL 4.41%) (GOOG 4.30%).
Both are experiencing strong growth in their respective cloud businesses. But if you had to choose between the two, which company offers the better investment opportunity? Let’s dig into each to come up with an answer.
IBM’s cloud strategy
IBM has spent the past few years reinventing itself as a cloud-first hybrid company. In a hybrid cloud implementation, a business uses both public and private clouds, using the former to perform basic IT infrastructure tasks, such as hosting a corporate website, and the second to secure confidential or critical data, including financial and customer records.
IBM was smart to focus on this area. The hybrid cloud market is expected to grow from $85.3 billion last year to $262.4 billion by 2027.
Additionally, IBM’s impressive list of enterprise customers is a perfect fit for hybrid cloud solutions. Big Blue’s customers include the world’s ten largest banks, governments and healthcare companies. These industries need the security of a private cloud while taking advantage of the cost savings of a public cloud.
IBM’s hybrid cloud strategy has proven successful. In its third-quarter earnings report, IBM generated revenue of $14.1 billion, a 6% increase from 2021. This is the third consecutive quarter of year-over-year revenue growth. on the other despite macroeconomic headwinds, such as a strong US dollar.
Big Blue also offers an attractive dividend, yielding around 4.8% at the time of this writing. The company can maintain this robust dividend thanks to its free cash flow (FCF). IBM expects to reach $10 billion in FCF this year, while dividend payments totaled about $6 billion over the past 12 months.
IBM has a strong dividend history, paying consecutive quarterly dividends since 1916. It also increased its dividend in April, marking 27 consecutive years of dividend increases.
Alphabet’s Google Cloud approach
Alphabet is growing its Google Cloud business the same way it drove the success of its popular search engine Google: by prioritizing customer acquisition and revenue growth over profitability.
That’s why Google Cloud is currently unprofitable, coming out of the third quarter with an operating loss of $699 million. But his business is growing rapidly. In just three quarters this year, Google Cloud sales nearly matched all of 2021’s revenue, continuing a multi-year streak of rising revenue.
|Period of time||Google Cloud revenue||Annual growth|
|Q1 to Q3, 2022||$19 billion||39%|
Google Cloud only accounted for about 10% of Alphabet’s third-quarter revenue, but it’s already ranked third among cloud computing companies behind industry leaders. Amazon and Microsoft. And Alphabet continues to invest aggressively in Google Cloud despite the shutdown of other bets such as its Stadia video game division.
For example, Alphabet acquired cybersecurity firm Mandiant in September for $5.4 billion, marking one of the company’s largest acquisitions in its history. Mandiant will strengthen Google Cloud security in a world where remote workers have grown from 23% of the US workforce before the coronavirus pandemic to nearly 60% in 2022.
Is IBM or Alphabet the best investment?
IBM and Alphabet have both been successful in their cloud computing endeavors, so investing in either is well worth it. After all, the cloud computing industry is expected to grow from $706.6 billion last year to $1.3 trillion by 2025.
But if I had to choose one of these cloud computing companies to invest in, I would lean towards Alphabet despite IBM’s success and attractive dividend.
Google Cloud’s revenue already exceeds Big Blue. IBM’s hybrid cloud revenue over the past 12 months totaled $22.2 billion. Google Cloud’s revenue was $24.5 billion over the same period.
Admittedly, Google Cloud’s success may be overshadowed by Alphabet’s digital advertising business, which accounted for $54.5 billion of its $69.1 billion in third-quarter revenue. And the ad industry is experiencing a downturn this year, leading Alphabet’s third-quarter ad revenue to increase just 2.5% year-over-year.
But Alphabet’s advertising business helps fund Google Cloud. Alphabet has generated $63 billion in FCF over the past 12 months, while IBM expects to reach a cumulative total of $35 billion in FCF over three years, from 2022 to 2024.
Additionally, Alphabet has several factors, along with Google Cloud, that make the company an attractive investment, including its dominance in search advertising. Alphabet grew revenue 41% year-over-year in 2021, and revenue continues to grow this year, reaching $206.8 billion over three quarters, up from $182.3 billion last year .
Google Cloud’s strong growth, Alphabet’s high FCF, and other areas of company strength provide compelling reasons to make Alphabet the best choice for investment in the growing cloud computing industry.
Suzanne Frey, an executive at Alphabet, is a board member of The Motley Fool. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Robert Izquierdo holds positions at Alphabet (A shares), Amazon, IBM and Microsoft. The Motley Fool owns and recommends Alphabet (A shares), Alphabet (C shares), Amazon and Microsoft. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.