COVID-19 keeps giving a perverse boost to technology’s giants as Amazon.com Inc. and Google LLC parent Alphabet Inc. today reported better-than-forecast fourth-quarter earnings thanks to strength in cloud computing and more. 

The companies had a lot to live up to. Today the Dow Jones Industrial Average jumped about 476 points, or nearly 1.6%, in anticipation of their results, which close the quarter’s reporting by the so-called FAANG big five technology stocks. Apple Inc., Facebook Inc. and Netflix Inc. reported their results in the last two weeks to mixed reactions among investors.

Neither company counts its cloud operation as its biggest revenue driver — though in Amazon’s case, its Amazon Web Services Inc. cloud unit accounts for much of its profit. Amazon’s biggest business is its retail operation, including Whole Foods, and by far Alphabet’s business remains dominated by online advertising.

But both companies’ cloud units are among the fastest-growing operations and all the more important for driving a wide range of technological innovations that spill over into its other businesses. Moreover, cloud computing remains top of budget for many companies, especially during the COVID-19 pandemic when they’re scrambling to transform themselves to be more agile and accommodate people working from home.

Apropos of that trend, Amazon also announced founder and Chief Executive Jeff Bezos would step back to become executive chairman in the third quarter as Amazon Web Services Inc. CEO Andy Jassy takes over.

Amazon overall reported a profit of $7.2 billion or $14.09 a share ona 44% jump in revenue, to $125.6 billion — its first $100 billion quarter thanks to huge holiday sales. Analysts polled by FactSet had expected a profit of $3.7 billion or $7.19 a share, up from $9.35 a share last year, on $119.7 billion in revenue. Amazon itself had forecast a range of $112 billion to $121 billion.

As for AWS, the leading cloud services provider, it reported revenue rose 28%, to $12.7 billion, steady with the third quarter but slower than 2019. Analysts had expected $12.77 billion. But given its substantial market lead, that’s a much larger absolute rise than rivals such as No. 2 Microsoft Corp. and Google. And its operating profit of $3.56 billion again accounted for more than half of the company’s overall operating profit.

Chief Financial Officer Brian Olsavsky said on Amazon’s earnings calls that AWS has a backlog of $50 billion, up 68% year-over-year. He also noted the unit now has a $51 billion annual revenue run rate.

Alphabet reported a profit of $15.23 billion, or $22.30 per share, on revenue of $56.9 billion. Analysts forecast a profit of $15.93 a share and revenue of $53.1 billion.

“The holiday season helped boost ad spend and continue the overall recovery that’s gone on since a trough in Q2 2020,” said Nicole Perrin, eMarketer analyst for Insider Intelligence. “We’re expecting YouTube in particular to continue growing at double-digit year-over-year rates as advertisers continue to turn to digital video ads, especially on CTV, which is a growing business for Google.”

Google Cloud revenue jumped 47% from a year ago, to $3.83 billion, just a hair over analysts’ forecasts. Although Google doesn’t break out different cloud revenues, Credit Suisse analyst Stephen Ju wrote in a recent note to clients that Google’s cloud services overall would be $3.64 billion in the fourth quarter, with Google Workspace apps accounting for $1.68 billion and Google Cloud Platform contributing $1.96 billion.

Alphabet and Google CEO Sundar Pichai said on the analyst earnings call that GCP revenue was the lion’s share of overall cloud. He also said Google Cloud has a $30 billion backlog, up from $19 billion just in the third quarter. The unit logged “several” billion-dollar cloud deals last year and also tripled the number of six-digit deals.

“We will continue to make disciplined investments” in cloud, he said. However, Chief Financial Officer Ruth Porat said the cloud unit logged a $1.2 billion operating loss, about the same as last year, and a loss of $5.6 billion on $13 billion in revenue for the year. That’s something of a surprise given how profitable AWS is for Amazon.

Porat said that loss could rise in the first quarter, then moderate in later quarters. Pichai alluded to a relatively fixed cost structure for cloud as well as the need to invest ahead of demand but cited a “favorable” trend toward companies undergoing digital transformations going forward.

Investors were generally positive about both companies’ results. Amazon shares rose about 1% in after-hours trading after rising 1.1%, to $3,380 a share, in the regular session. They were up by 66% in the past year. Alphabet shares jumped more than 7% in extended trading after a 1.4% rise during the trading day, to $1,919.12 a share.

A few more details on each companies’ results:

Amazon

Amazon said it expects operating profit in the first quarter of $3 billion to $6.5 billion on revenue of $100 billion to $106 billion, up 33% to 40% from a year ago. Wall Street is modeling adjusted earnings to jump 80%, to $9.03 a share, on a  revenue increase of 27%. The large earnings growth projection is the result of the comparison to the early days of the pandemic a year ago that caused huge onetime expenses and customers buying lower-margin necessities.

Analysts think 2020 will be hard for the company to top, given the twin benefits of COVID-related jumps in e-commerce and cloud computing. That said, JPMorgan analyst Doug Anmuth said in a note last week that “we remain bullish on Amazon, with strong e-commerce and public cloud trends continuing to date and Amazon well-positioned as the clear leader in both.”

“The combination of Prime Day kicking off the quarter in October plus a historically strong holiday ecommerce season give Amazon’s top line plenty of momentum,” said eMarketer Principal Analyst Andrew Lipsman. “The bottom line may see some pressure due to rising costs and softening growth rates in AWS, but recent acceleration in Amazon’s high-margin ads business could easily counteract those concerns.”

And despite the higher costs associated with investments to keep its employees safe during the pandemic — more than $11 billion last year — Nucleus Research analyst Daniel Elman thinks the company will remain dominant in e-commerce. “With this change in consumer behavior likely to remain permanent, and Amazon’s accelerating shipping and fulfillment speeds, the company’s dominance as the go-to platform for e-commerce will remain unchallenged,” he said.

Alphabet

Beyond advertising, Alphabet’s Other Bets segment, which includes self-driving car unit Waymo and life sciences unit Verily, grossed $196 million in revenue in the fourth quarter and $657 million during the year, with an annual operating loss of $4.48 billion in 2020. Meantime, Google’s “Other Revenue,” which includes Play as well as hardware such as Google Home and smartphones, came in at $6.67 billion in the fourth quarter, up from $5.26 billion a year ago.

Image: Bessi/Pixabay