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Google Cloud, which generated $2.8 billion in revenue last quarter, is one of the 'bright spots' as advertising slows and the company cuts costs, analysts say (GOOG, GOOGL)

Google CEO Sundar Pichai and Google Cloud CEO Thomas Kurian
  • Google Cloud's revenue grew 52% from a year ago despite the coronavirus crisis even as the company's advertising business took a hit. 
  • Analysts say that the coronavirus pandemic may lead more businesses to move to the cloud. 
  • However, the coronavirus crisis is still causing some cloud-related challenges: Google is facing delays in building data centers and closing large deals.
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Analysts see Google Cloud as one of the company's "bright spots" amid the slowdowns in its advertising business that it reported in its first quarter earnings on Tuesday.
Alphabet revealed that Google Cloud generated $2.8 billion in revenue, a 52% year-over-year increase that was in line with its 53% increase the quarter before. That's compared to sluggish 10% year-over-year growth for its ad business, which grew about 16% in 2019.
These results show that Google Cloud is emerging as a "formidable competitor" in the cloud market, where it's up against Amazon Web Services and Microsoft, Jefferies equity analyst Brent Thill wrote in a note to clients following the report.
Not that Google Cloud is completely immune to the effects of the pandemic. It's started cutting costs,  slowing down both hiring and its rate of building cloud data centers.
Here's what analysts had to say about Google Cloud's biggest strengths and challenges during the pandemic:

The pandemic may be an 'accelerant' for both GCP and G Suite

While companies are slashing their marketing budgets – which in turn impacts Google's advertising business – analysts predict that the cloud division could see a major pick-up as more people work remotely and businesses move to the cloud.
As SunTrust managing director Youssef Squali put it, the pandemic may even be an "accelerant" for Google Cloud, which he described as one of the company's "bright spots."
Google Cloud's growth was driven in large part by GCP, especially its data and analytics platform. In addition, the coronavirus pandemic could prompt more businesses to move from on-premise data centers to the cloud, where they can rent out as much capacity as they need. CEO Sundar Pichai said on the call that business that were once "hesitant to shift their budgets" are now "asking the questions deeper" and moving to the cloud.
Pichai said that that was a "longer-term trend" that the company is "excited about," and analysts agree:
"We believe the COVID-19 crisis will accelerate the overall shift to digital," Doug Anmuth, J.P. Morgan managing director, wrote in a note to clients,"And over time we believe that will result in incremental online ad dollars, greater adoption of the cloud, and increased dependence on technology."
Google Cloud's productivity tools, G Suite, saw increased adoption, too, hitting 6 million paying customers. 
"The offering is helping companies and employees be productive in a distributed and remote work environment," Ralph Schackart, partner at William Blair, wrote in a note to clients following the report. "Continued growth in both seat count and average revenue per seat is propelling the ongoing growth of G-Suite."

But Google Cloud will still face challenges

Still, it's not all sunshine and rainbows for Google Cloud.
While analysts predict that it will continue growing during the pandemic, the unit still faces some significant challenges.
Google Cloud had previously been on a hiring spree as it worked to triple its salesforce over the next few years. However, that ambition goal may be stunted as Google has slowed down hiring for the rest of the year.
The company also expects to face delays in data center construction because of the coronavirus pandemic, Alphabet CFO Ruth Porat said on the company's earnings call. That's particularly important because it needs those data centers to scale its cloud as it tries to catch up to AWS and Microsoft.
Finally, CEO Pichai also pointed out on the call that although Google Cloud is still winning deals, it's "taking a bit longer" as its customers also feel the impact of the economic downturn:
"Naturally, as you would expect, our customers are impacted through moments like this, too."
Do you work at Google Cloud? Got a tip? Contact this reporter via email at rmchan@businessinsider.com, Signal at 646.376.6106, Telegram at @rosaliechan, or Twitter DM at @rosaliechan17. (PR pitches by email only, please.) Other types of secure messaging available upon request. 
SEE ALSO: Google Cloud generated nearly $2.8 billion in revenue this quarter, up 52% from a year ago
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