Google Stops Project For Cloud Services In China

Alphabet Inc’s Google (GOOGL) has stopped plans to develop its cloud computing project in China and other sensitive countries partly due to geopolitical tensions and the coronavirus pandemic.

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According to the decision, which was first reported by Bloomberg, the search giant in May discontinued the cloud project known as “Isolated Region”, which sought to meet nations’ need to control data within their borders. The project was considered a “massive strategy shift,” which had involved hundreds of workers around the globe.

Google’s decision was made partly because of global political divisions, which were exacerbated by the Covid-19 pandemic, according to the Bloomberg report. The geopolitical issues put demands on Isolated Region that it couldn’t deliver.

The project would have allowed Google to set up cloud services controlled by a third party, such as a locally owned company or a government agency. The result would be a business isolated from Google’s existing cloud computing services, which include data centers and computer networks.

“What we learned from customer conversations and input from government stakeholders in Europe and elsewhere is that other approaches we were actively pursuing offered better outcomes,” a Google spokeswoman said following the report. “Google does not offer and has not offered cloud platform services inside China.”

Google as well as other major tech companies such as Microsoft (MSFT) and Amazon.com (AMZN), have been investing into expanding their cloud computing capabilities and offerings to add another revenue growth channel beyond search advertising. While Amazon and Microsoft sell their cloud services in mainland China, Google hasn’t. Last year Google Cloud’s revenues increased 53% to $8.9 billion year-on-year as the search giant targeted finance and government sectors which are increasingly in need of security shields and features to protect confidential data.

Needham analyst Laura Martin earlier this week lowered Google’s 2Q20 revenue estimate to down 7% year-on-year because of expectations of declining US search revenue. Martin noted that eMarketer projects that Google-search revenue will decline in 2Q and 2020, for the first time in history, adding that she expects international ad revenue to be down more than in the U.S.

“We are more optimistic than eMarketer for 2H20, so our GOOGL revenue estimate for FY20 is for flat revenue vs eMarketer’s 3.3% decline, including a 7.2% y/y search decline,” Martin wrote in a note to investors maintaining a Buy rating on the stock with a $1,800 price target.

Shares in Google have fully recovered since dropping to a low in March and are now trading more than 12% higher than at the start of the year. The stock advanced less than 1% to $1,502.79 at the close of trading on Wednesday.

Indeed, the stock’s upside potential now looks more limited. The average analyst price target of $1,531.50 indicates shares are almost fully priced and have room to advance a mere 1.9% in the coming 12 months. (See Alphabet’s stock analysis on TipRanks)

Overall, the Wall Street rating outlook for Google remains bullish. The Strong Buy analyst consensus boasts 28 Buys versus 2 Holds.