If Google is targeting Wiz, investors should target Cybersecurity

What happened

According to the WSJ, Alphabet has approached Wiz, a private cloud security firm, with a $23bn proposal. This would be the second-biggest cybersecurity deal of all time, behind only Cisco's $28bn acquisition of Splunk. 

This potential acquisition, which follows the acquisition in '22 of Mandiant, another cybersecurity firm, is designed to strengthen Google Cloud's security features. The integration of Wiz’s technology aims to position Google Cloud as a safer, more reliable option in the competitive cloud market, against major cloud service providers like Amazon AWS and Microsoft Azure. This move also highlights the importance of integrated security solutions and sets a new valuation benchmark in the cybersecurity industry.

Impact on our Investment Case

The acquisition of Wiz by Google would not only highlight the premium that major tech companies place on cutting-edge cybersecurity solutions but also underscore the increasing importance of integrated security in cloud services. With the AI-related boom in data usage through Cloud-based infrastructure, the battlefield is heating up. Google's current 10% market share in the cloud sector trails behind Amazon's 32% and Microsoft's 20%. By enhancing its cloud offerings with Wiz's security technologies, Google aims at narrowing the gap with its competitors. It underscores the value of security as a core component of cloud services and supports an investment focus on companies that provide broad platform solutions or possess advanced technological capabilities.

These are the long-term drivers that have underpinned our Cybersecurity portfolio since its inception.

A company like Palo Alto Networks Inc, known for its wide-ranging security solutions and platform approach (as we detailed in this note), may see this as an opportunity to emphasize its own integrated offerings. As enterprises increasingly value integrated solutions, platform providers will continue to leverage their unique capabilities and the completeness of their security coverage.

Firms such as Zscaler Inc and Cloudflare Inc, which specialize in specific cloud security technologies, face a dual challenge and opportunity. On one side, they are facing behemoths with huge resources in the competitive arena, but on the other, their focused and nimble approach allowed them to lead the race. It is the pace of innovation they have been able to sustain, that allowed them to stay ahead of broader platforms like Google Cloud, emphasizing their specialized technologies and performance advantages in areas like encryption and secure data transit. Keeping up such momentum will be the key driver for their stock performances.

Endpoint security companies like CrowdStrike and data security firms such as Varonis Systems Inc have adapted and taken advantage of the evolving landscape where cloud and security are increasingly intertwined. These companies are leading the way by enhancing their integration with cloud environments and developing new features that address emerging security threats.

Overall, while Google's acquisition of Wiz may not disrupt the market as such, it validates the increasing importance of cybersecurity integration in cloud services and supports a bullish outlook for both comprehensive security providers and niche technology innovators. Indeed the valuation multiples of such a deal, although difficult to pinpoint with certainty given the private nature of the target, appear to be close to double current market multiples of about 6.5x sales for the Cybersecurity sector as a whole. 

Our Takeaway

The acquisition reflects a broader industry trend where cybersecurity is increasingly becoming integrated with core business operations, particularly cloud-based services. 

Investors should consider both broad platform providers and specialized technological innovators when looking for growth opportunities in the cybersecurity sector. As the market continues to evolve, companies that can offer comprehensive, integrated, and technologically advanced solutions are likely to be at the forefront of investor interest and market value appreciation. 

In summary, Google's acquisition of Wiz would be a significant development in the cybersecurity industry, impacting market valuations, competitive dynamics, and investment strategies. This move provides valuable insights into the evolving landscape of cybersecurity and highlights the critical role of innovative, integrated security solutions in today's digital economy. As the market continues to evolve, our strategy continues to focus on companies that adapt and innovate to stay ahead of the curve.