Better Cloud Computing Stock: IBM vs. Alphabet

While tech stocks were hammered in 2022, the cloud computing industry continued at an impressive growth rate. According to research firm Gartnerthe public cloud sector alone is estimated to grow by 20% this year.

This amounts to nearly half a trillion dollars in 2022. Just a decade ago, global public cloud computing revenue was only $26.4 billion.

Given the cloud industry’s rapid expansion, competitors abound. Among the bigger players are tech giants IBM (IBM 2.77%) and Google Cloud, owned by Alphabet (GOOGL 4.41%) (GOOG 4.30%).

Both are seeing 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 arrive at an answer.

IBM’s cloud strategy

In recent years, IBM has reinvented itself into a hybrid cloud-focused 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 latter 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 an ideal fit for hybrid cloud solutions. Big Blue’s clients include the top ten banks, governments and healthcare companies in the world. These industries need the security of a private cloud while capturing the cost savings of a public one.

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IBM’s hybrid cloud strategy has been successful. In its third quarter earnings report, IBM generated revenue of $14.1 billion, a 6% increase over 2021. This is the third consecutive quarter of year-over-year revenue growth despite macroeconomic headwinds, such as a strong US dollar.

Big Blue also offers an attractive dividend, yielding about 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 last 12 months.

IBM has a strong dividend record, paying consecutive quarterly dividends since 1916. It also raised its dividend in April, marking 27 consecutive years of dividend increases.

Alphabet’s Google Cloud approach

Alphabet is building its Google Cloud business the same way it generated success for its famous Google search engine: by prioritizing customer acquisition and revenue growth over profitability.

That’s why Google Cloud is currently unprofitable, exiting the third quarter with an operating loss of $699 million. But his business is growing fast. In just three quarters this year, Google Cloud’s sales nearly equaled all of 2021’s revenue, continuing a multi-year streak of rising revenue.

Data Source: Alphabet. YOY = year-on-year.

Google Cloud only made up about 10% of Alphabet’s revenue in the third quarter, but it’s already the third-largest cloud computing company behind industry leaders Amazon and Microsoft. And Alphabet continues to invest aggressively in Google Cloud despite shuttering other bets like its Stadia video game division.

For example, Alphabet acquired cybersecurity firm Mandiant in September for $5.4 billion, one of the company’s largest acquisitions in its history. Mandiant will boost Google Cloud’s 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 better investment?

Both IBM and Alphabet have proven successful in their cloud efforts, so investing in one of them is worthwhile. After all, the cloud computing industry is predicted to grow from $706.6 billion last year to $1.3 trillion by 2025.

But if I had to pick one of these cloud computing companies to invest in, I’d lean toward Alphabet despite IBM’s success and attractive dividend.

Google Cloud’s revenue has already surpassed 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.

Granted, 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 Q3 revenue. And the advertising industry is experiencing a downturn this year, resulting in Alphabet’s third-quarter ad revenue increasing just 2.5% year over year.

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But Alphabet’s advertising business helps fund Google Cloud. Alphabet generated $63 billion in FCF over the past 12 months, while IBM expects to achieve a cumulative FCF total of $35 billion over three years, from 2022 to 2024.

Alphabet also has several factors, along with Google Cloud, that make the company an attractive investment, including its dominance in search advertising. Alphabet increased year-over-year revenue by 41% in 2021, and its revenue continues to grow this year, reaching $206.8 billion over three quarters compared to $182.3 billion last year.

Google Cloud’s strong growth, Alphabet’s solid FCF, and the company’s other areas of strength provide compelling reasons to make Alphabet the better choice for an investment in the fast-rising cloud computing industry.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Robert Izquierdo has positions in Alphabet (A shares), Amazon, IBM and Microsoft. The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares), Amazon and Microsoft. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.


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