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Should Rackspace and Other Cloud Computing Stocks be Afraid of Google?

Stocks in this article: AMZN GOOG RAX RHT

Chris Lau, Kapitall: Google is joining the ranks of stocks offering cloud services, so should competitors be worried?

News that Google (GOOG) is entering the cloud services space spooked investors of cloud computing stocks like Rackspace Hosting Inc. (RAX). Google has taken ts Compute Engine Infrastructure as a Service platform out of beta.

Prices for the cloud services were also cut, setting the stage for a price war against established players. Will investors overreact to the new competition?

Raxspace, Amazon, and Google by the numbers

Click on the interactive charts to see data over time. Sourced from Zacks Investment Research.

From above, the 5% drop in Rackspace on the day of Google’s announcement brings shares back to prices not seen since June 2013. Its forward P/E is 53, compared to 25 for Google and over 70 for fellow cloud computing player Amazon (AMZN).

Rackspace will likely face more pressure from Google as the company supports the OpenStack platform.

Google’s entry into cloud computing is a clear threat to established players. Compute Engine supports Linux, which will also put pressure on Red Hat (RHT). The computing instance is also very powerful: 16-cores and support for intensive data I/O workloads.

But Google’s pressure on Amazon is not likely to be acute at this time. Amazon’s AWS ecosystem is established in the industry, and is entrenched in many companies. Still, investors should watch for further pricing erosion for AWS offerings. The computing industry benefits from lower prices, but shareholders in Amazon and other cloud computing stocks do not.

Cloud solutions are rapidly becoming a commoditized product. This could mean lower prices for end-users. The hard drive industry underwent a dramatic decline in pricing, but demand for storage kept going up. 

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