Google Cloud just posted its strongest-ever revenue growth in the second quarter, but analysts say that several "nightmare scenarios" could still set it back in its race against Amazon and Microsoft's clouds.
While Google Cloud still lags significantly behind both Amazon Web Services and Microsoft Azure in market share — with 6.1%, compared to 40.8% for AWS and 19.7% for Azure, according to Gartner — it's seeing significant growth.
Google Cloud reeled in $4.6 billion in revenue last quarter, up 54% from the same time last year, which was the greatest year-over-year increase out of the Big Three cloud platforms.
Still, analysts pointed to three main challenges ahead that could stunt its ascent and turn its dreams of catching up to Amazon and Microsoft into a nightmare:
The 'distraction' of antitrust
Google is facing antitrust scrutiny, which its closest rival, Microsoft, has largely escaped.
"It's a distraction when they're trying to compete with two of the arguably most capable companies," Daniel Newman, principal analyst at Futurum Research, said. "A regulatory battle is not a great scenario for Google Cloud."
The scrutiny could create more negative sentiment against Google Cloud and possibly turn customers away, says Nick McQuire, chief of research at CCS Insight.
"Google Cloud is doing a lot to win the trust of the market in this context, but some firms may feel that the heat in this scenario may be too much to absorb when constructing a long-term partnership with the company," McQuire said.
A lot of weight hangs on the new Pentagon contract
The Department of Defense recently scrapped its winner-take-all Joint Enterprise Defense Infrastructure contract, a $10 billion cloud project that Microsoft had swiped in a surprise win over Amazon. Instead, the DOD is pivoting to the Joint Warfighter Cloud Capability contract, designed for multiple clouds.
Google Cloud dropped out of the initial race for JEDI, reportedly because of its corporate values, but being part of the new, multi-cloud contract could give it a big credibility boost. Google Cloud would not want to get omitted, analysts say.
"That would really create some question marks around Google and how far down the road the company really is," Newman said.
The biggest nightmare is slim-to-none margins indefinitely
The biggest nightmare for Google Cloud would be that it never really catches up to its bigger rivals. It could be a low-cost cloud provider that never becomes one of the main players, says Dan Morgan, trust portfolio manager at Synovus.
Google Cloud has been making massive investments in hiring and building data centers to catch up to Amazon and Microsoft, including a new data center region in India. Under CEO Thomas Kurian, its workforce expanded from 25,000 to 37,000 employees, Bloomberg reported.
But there's also the risk that the returns won't be high. Google Cloud is not yet profitable, although it cut down on losses this quarter.
According to Edward Jones senior analyst Dave Heger, the nightmare scenario would be "Google continually making large investments in its cloud business without it turning profitable or only achieving a low return on the investment."
Google declined to comment.
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