Wall Street Isn’t Crazy About Alphabet’s Deal for Wiz
March 18, 2025, 1:46 pm EDT
Capital discipline, a continuing concern among investors in Alphabet, resurfaced as a worry Tuesday when the company said it would pay $32 billion in cash for the private cybersecurity firm Wiz.
In early afternoon, Alphabet shares were down 2.8% at $161.91, while the S&P 500 was down 1.1%. That left the stock down 15% in 2025 and more than 20% below its 52-week high of $208.
The companies didn’t disclose Wiz’s revenue in disclosing the deal and Alphabet didn’t respond to a request for information about that figure. But multiple media outlets have reported that Wiz had $500 million of annual recurring revenue at one point during 2024 and aimed to reach $1 billion in 2025.
If those figures are accurate, it would mean that Alphabet is paying more than 30 times projected 2025 revenue. That is a stiff price; most software companies trade for less than 10 times sales. Two of the priciest software companies, CrowdStrike
and Cloudflare
NET
, fetch about 17 times annualized 2025 revenues.
In 2024, Alphabet approached Wiz about a potential $23 billion deal, according to The Wall Street Journal.
The deal is small relative to Alphabet’s market value of $2 trillion, and Alphabet has the wherewithal to pay for the transaction, given that it ended 2024 with $96 billion of cash and equivalents. But the deal would absorb about a third of that total, Barron’s estimates. It also would be equivalent to 44% of its trailing annual free cash flow, according to a research note Tuesday from RBC Capital Markets analyst Brian Erickson.
Like Microsoft and Meta, Alphabet is significantly boosting its capital spending in 2025. It has said it expects to spend $75 billion, up more than 40% from 2024, as it builds out its artificial-intelligence capabilities to underpin its industry-leading search business.
Alphabet said the Wiz deal would add a key element to its high-growth cloud-computing business, which had $43 billion in revenue last year. On a call Tuesday morning, Alphabet executive Thomas Kurian, who heads the cloud-computing division, said the deal will “vastly improve how security is designed, operated and automated.”
Chief Financial Officer Anat Ashkenazi said the deal would create long-term growth. She reiterated that Alphabet prioritizes organic growth, then mergers and acquisitions, and then returning capital to shareholders via dividends and stock buybacks.
Alphabet’s stock now trades for about 18 times projected 2025 earnings and 16 times estimated 2026 profits. Those numbers are below the figures for the broader market and represent the lowest valuation among the Magnificent Seven tech stocks. Alphabet has rarely traded so cheaply since the company went public as Google in 2004.
Doing an expensive deal when a stock is cheap generally hasn’t sat well with investors, who might like to see Alphabet boost its stock-buyback program. Wall Street already was concerned about the threats to Alphabet’s search franchise from AI-enabled upstarts.
Wall Street has high confidence in Meta Platforms, its CEO Mark Zuckerberg, and that company’s investment strategy. There is less confidence in Alphabet’s approach.
In his client note, Erickson called the Wiz deal a “mixed” bag for Alphabet
“This builds GOOGL’s capabilities in cyber and could gain itself access to a new/broader set of workload opportunities with the Wiz customer base. Companies will still have significant demand for more cyber-focused tools, however, we’re encouraged at this enhancement in such an important area with cloud adoption remaining underpenetrated combined with the proliferation of AI,’ he wrote.
“Less favorably, we believe this could be looked as GOOGL needing additional horsepower for winning new workloads,” he said, noting that the deal came as growth has slowed in Alphabet’s cloud-computing business.
Alphabet has made some good acquisitions, including YouTube. But it can be a red flag when companies announce merger deals and don’t disclose any financial information about the target.
That generally means a rich price. So far, Alphabet investors aren’t thrilled.
Write to Andrew Bary at andrew.bary@barrons.com
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