Google’s parent company Alphabet is in talks to acquire cloud security start-up Wiz. If finalised, the proposed US$23 billion buyout would not only be the largest in Alphabet’s history but also the second-largest in the cyber security sector, trailing only Cisco’s US$28 billion purchase of Splunk in 2022.
The offer made by Alphabet is nearly double Wiz’s recent valuation of US$12 billion, and a whopping 65 times the firm’s annual recurring revenue in 2023 (US$350 million).
In a conversation with InvestorDaily, Global X investment strategist Billy Leung pointed out multiple factors contributing to the substantial gap between Wiz’s valuation and the proposed acquisition price, and suggested that similar undervaluation issues may be affecting other businesses in the cyber security sector.
“I think for one, obviously, there is a mispricing of general cyber security stocks, especially those in the US,” Leung highlighted.
“But number two, it’s the scarcity value.”
In particular, Google is aiming to significantly enhance its cloud security capabilities by integrating Wiz’s advanced technology. Leung explained that capabilities like those offered by Wiz are in short supply and, as such, are highly sought after.
“There is also a rush to get into this kind of cloud security”, he added, noting that by addressing its vulnerabilities, Google will improve its competitive edge against Amazon’s cloud computing services AWS and Microsoft’s Azure, potentially attracting more enterprise customers.
“Amazon has it, Microsoft has it, but Google doesn’t, which is why Google is rushing and saying, ’Okay, we’re a step behind right now, and we need to make an acquisition in order to catch up’,” said Leung.
Despite the strategic rationale behind the acquisition, some online discussions have raised doubts about the reasoning behind the Magnificent Seven’s acquisition strategy.
In an online Reddit forum frequented by investors, a user said: “Let’s be honest, stale/large cap companies look for start-ups/hype/growth. A lot of them overpay, but like anything else that is scarce/hot technology or a great fit the rich valuations come with it, regardless if the buyer can continue their growth.”
Another wrote: “Overpaying for a four-year-old company isn’t good for shareholders.”
But also among reddit users were those defending Wiz, with one labelling the company as being “10 steps ahead” of industry counterparts, adding “see Wiz product in action and you would totally understand why”.
The industry’s ‘thousandth paper cut’
In a recent market outlook, Leung separately highlighted that the cyber security landscape is undergoing a “pivotal transformation”, fuelled by an escalating awareness of cyber threats, stringent regulatory mandates, and rapid technological advancements.
“We stand on the cusp of a significant growth surge, where the cumulative effect of numerous small incidents and breakthrough innovations is poised to catalyse substantial growth – marked by what might be described as the proverbial ‘thousandth paper cut’,” he wrote.
Most notably, the rising frequency and scale of cyber attacks is keeping these technologies front-of-mind, according to the market strategist. With the number of ransomware attacks having surged, so too has global damages, estimated to have reached US$30 billion in 2023, up from US$11.5 billion in 2019.
“High-profile breaches affecting major corporations and critical infrastructure have heightened the sense of urgency,” he said.
Generative AI, Leung added, is also enhancing the productivity of cyber professionals by automating tasks such as alert summarisation and threat detection.
“AI-driven solutions are expected to capture a substantial portion of the market, potentially automating up to 50 per cent of cyber security spending on services. This shift addresses the talent shortage in the industry and drives efficiency in combating threats,” he outlined.
But AI can also be leveraged to automate malicious activities.
“This is a double-edged sword; while AI provides powerful defensive tools, it also enables more sophisticated cyber attacks,” he cautioned.
Leung further pointed out that the transformation of the cyber security landscape is significantly benefiting companies like CrowdStrike, which are taking advantage of the increased need for security due to more remote work, cloud usage, and connected devices.
In particular, its focus on advanced threat detection and response is expected to drive significant growth, with projected annual recurring revenue exceeding US$4 billion over the next two years.
“These companies’ strong strategies and innovative solutions highlight the growing investment opportunities in the cyber security industry.”
“As the industry reaches its tipping point, now is the time to consider investing in cyber security. The sector’s growth potential and critical importance in today’s digital world make it a compelling investment case,” Leung concluded.
