Google Cloud could overtake Google's search business within two years at its current growth pace, Mark Mahaney, senior director at Evercore ISI, said ahead of Alphabet's quarterly earnings on Oct. 28.
That would give Alphabet a larger business alongside search, its established source of advertising revenue. Mahaney described cloud as profitable, though less profitable than search, in the Bloomberg Technology interview published that day.
Mahaney said market expectations circulating ahead of the results included cloud revenue growth exceeding 100% from a year earlier. That growth would include direct sales of Google's chips, a new source of revenue.
Those sales would broaden the company's business, but Mahaney said his expectations were modest because selling chips to outside customers appeared to rank below Google's other uses for them.
He put improving Google's own products and services first, followed by renting access to the chips through Google Cloud. External chip sales ranked third in his reading of the company's priorities.
“I may be wrong, but that is my reading of how the company thinks about its priorities,” he said.
Mahaney said cloud, search and YouTube were the businesses to watch, alongside the longer-term potential of Waymo. He expected the earnings announcement to provide more information on the latter.
On spending, he said investors would look for when Alphabet's free cash flow, the cash left after operating costs and capital spending, stopped deteriorating. He did not expect it to turn positive next year.
Alphabet generates more than $200 billion in operating cash flow, Mahaney said. The question was whether that cash generation would rise faster than capital spending next year, allowing expectations for free cash flow to improve.
He also expected investors to seek similar signs at Meta and Amazon, with Google and Amazon potentially reaching that point first. He gave no timetable for either company.
Mahaney then turned to consumer products, saying he wanted Google to offer a free AI agent, software that carries out tasks for users. He hoped the earnings call would provide a launch timeline.
He said AI had already helped Google's search business, linking increases in paid clicks and advertising prices over the past two years to improvements for consumers and advertisers.
He recalled that Google traded at 15 times earnings a year earlier amid concerns that ChatGPT would disrupt search. He said better advertising results had instead encouraged marketers to pay more.
Mahaney said the consumer market could be smaller than the business market but still very large. His remarks left open when Google might launch the consumer agent and when free cash flow would recover.
