Is Alphabet’s $23 billion bid for Wiz a buy signal?

In a move signaling its commitment to enhancing its cybersecurity offerings, Alphabet Inc. (NASDAQ: GOOG) is reportedly nearing its largest acquisition ever.

According to a Wall Street Journal report from July 14, 2024, Alphabet is in advanced discussions to acquire the cybersecurity startup Wiz for approximately $23 billion.

This potential acquisition not only marks a significant expansion for Google’s suite of services but also reflects the company’s strategic pivot towards strengthening its cloud computing offerings, an area where it currently trails behind industry leaders Amazon Web Services and Microsoft Azure.

Wiz, founded in 2020 in Israel and now based in New York, has quickly become a notable player in the cybersecurity arena. Under the leadership of CEO Assaf Rappaport, Wiz has specialized in providing AI-driven real-time threat detection and response services.

Impressively, Wiz secured $1 billion in funding earlier this year and boasts an annual recurring revenue of $350 million as of 2023, a significant jump from previous figures.

The acquisition could serve as a catalyst in enhancing Google Cloud’s market position against its competitors.

Regulatory hurdles and antitrust scrutiny

This ambitious acquisition could potentially be double the amount Google paid for its previous large-scale purchase, Motorola Mobility, back in 2012. However, the deal is not without its risks and complications.

The tech giant has previously faced challenges with large acquisitions, such as the Motorola deal, which was sold at a loss, and the Fitbit acquisition, which faced regulatory hurdles before approval.

The Biden administration’s stringent stance on tech consolidation and antitrust issues adds another layer of complexity to the deal.

Google has already been under scrutiny, with the Justice Department targeting its search engine and digital advertising-technology business in separate cases.

The verdict in the search case is anticipated this summer. Given the administration’s history of blocking or scrutinizing deals such as Penguin Random House’s acquisition of Simon & Schuster and Amazon’s attempted purchase of iRobot, Alphabet might face significant obstacles in its bid to acquire Wiz.

Q2 earnings preview

As Alphabet Inc. gears up for its second-quarter earnings report, scheduled for release on July 23, 2024, expectations are set high.

Analysts project significant year-over-year growth with an estimated EPS (Earnings Per Share) of $1.84, matching both the normalized and GAAP figures, up from $1.44 in Q2 2023.

Revenue expectations are also bullish, anticipating a jump from $74.6 billion in the previous year to $84.07 billion.

This positive outlook is supported by the last 90 days of analyst activity, which has seen 35 upward EPS revisions and no downward revisions, highlighting a strong consensus on Alphabet’s robust performance and potential growth.

Challenges ahead: Rosenblatt’s downgrade and AI risks

However, not all is smooth in Alphabet’s horizon. Recently, Rosenblatt Securities issued a downgrade of Google’s stock from Buy to Neutral, with a new price target of $181.

The downgrade stems from multiple transition risks that Alphabet faces, notably the impact of artificial intelligence on its lucrative search business.

Barton Crockett, an analyst at Rosenblatt, pointed out potential short-term negative impacts on search ad revenues due to AI innovations.

He also noted emerging evidence of Google losing search market share to competitors like Microsoft’s Bing and increasing competition from retail media networks operated by Walmart and Amazon.

Furthermore, Amazon’s aggressive push into video advertising poses a threat to YouTube’s ad sales, which is another concern for Alphabet’s diversified income stream.

As Alphabet navigates through these transformative initiatives and potential regulatory battles, the financial community will closely monitor how these moves could affect the company’s fundamental strength and market valuation.

With the impending earnings report and ongoing negotiations, this period could be pivotal for Alphabet.

Now, let’s transition from these fundamental aspects and see what the charts have to say about Alphabet’s stock price trajectory, diving into the technical analysis that could reveal future trends.

Options offer better risk-reward going into earnings

The year 2022 was brutal for Alphabet’s stock with shares tumbling more than 40% from highs above $150 to lows below $90.

However, the rally we have seen in tech stocks since the start of 2023, especially in the Mag7, has caused the stock to more than double since then as it now trades at $186.

GOOG chart by TradingView

Though the stock remains in a solid uptrend on the long-term charts, it has recently found resistance trading above $190. Whether this is a minor resistance or a strong one will become clear in the next few days as the company reveals its Q2 earnings.

Considering the short-term weakness, it is not advisable to buy the stock going into earnings. However, traders who want to bet on an earnings upside can buy GOOG $190 Call option expiring on July 26 near $4.80.

Traders who want to short the stock to capitalize on the short-term weakness should also avoid shorting the stock outright as any positive earnings surprise can lead to it opening with huge gains.

A low-risk high-reward trade that they can take currently would be to buy GOOG $180 Put option expiring on July 26 near $3.00.

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