Alphabet Inc (GOOG) NPV C

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Alphabet has agreed to buy cloud security platform Wizz for $32bn in an all-cash deal.

The deal is expected to complete in 2026, subject to regulatory approvals. Wizz is expected to form part of the Google Cloud segment.

The share price fell 4.0% in early trading.

Our view

Alphabet has had its eye on cloud security provider Wizz for some time, with an attempt rejected last year given the tough environment for getting deals done. An improved offer, and hopes that the new regulator will be more pro deal, seems to have got the job done.

The price tag does represent a premium to Wizz’s closest listed peers, but it’s growing at a rapid pace and helps complete the security package that Alphabet’s cloud business can offer. The balance sheet is a source of major strength, with over to $70bn of net cash comfortably covering the deal.

Google’s Cloud growth has been a little lower than expected, but 30% over the fourth quarter was still strong, and management’s comments that demand is still outstripping supply gives us confidence that the big increase in 2025 investment has merit.

Still, the tech giant is an advertising business at its core. Marketers spend handsomely to put their products and services in front of Google and YouTube's captive audiences. Advertising revenue growth had looked like it might be softening as the market matured, but that doesn't look to be the case.

The rise of language models presents both an opportunity and risk for the search business. Google search has long been the gatekeeper to the internet, but competition is heating up, and Alphabet faces a genuine challenge of adapting its search proposition to retain that dominance.

The strength of Google search in recent quarters is a sign that AI may already be delivering incremental improvements. AI overviews are rolling out to more users, and the numbers back up commentary that engagement is improving. Advertisers are still getting bang for their buck – which was previously a concern.

The scale and importance of the cloud business continues to rise. It's been a huge benefactor of the AI wave, and with its customer base more aligned to businesses with large datasets and AI needs, it should be better suited than it was during the first wave of cloud buildout.

Alphabet is investing heavily in increasing its cloud infrastructure to handle future demand. It has the cash flows to stomach the increases investment, but over time it will lead to higher cost. The expected hit to margins hasn’t come yet, with impressive efficiency improvements doing their job.

The valuation looks attractive to us, and we think Alphabet’s range of businesses offer a strong platform to drive earnings growth from here. But there are real challenges from regulators and competition in the search space.

Environmental, social and governance (ESG) risk

The technology sector is generally medium/low risk in terms of ESG, though some segments are more exposed, like Electronic Components (environmental risks) and data monetisers (social risks). Business ethics tend to be a material risk within the tech sector, ranging from anti-competitive practices to intellectual property rights. Other key risks include labour relations, data privacy, product governance and resource use.

According to Sustainalytics, Alphabet’s overall management of material ESG issues is average.

Monopoly and market dominance concerns are a key regulatory risk. It remains the subject of antitrust investigations in several countries, leading to calls from both EU and US regulators for the breakup of its online advertising business. Alphabet’s management of data handling is strong, aided by its deep pockets. But this remains a key risk to monitor in the evolving landscape of AI.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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