Alphabet has made multiple acquisitions in the past couple of years — but the next one may be its biggest deal ever.
Alphabet (GOOG -2.35%) (GOOGL -2.40%) is a behemoth in the tech sector. The company generates tens of billions of dollars in free cash flow every year. It has some incredibly strong assets in YouTube and Google Search, and it’s always looking for ways to get bigger and more diverse. And recently, the company has reportedly been in talks to buy some fairly large companies.
Could Alphabet secure a big acquisition this year, and would that be a good move for the business and its investors?
Rumored attempts to acquire HubSpot and Wiz have fallen through
Earlier this year, there were rumors that Alphabet was looking to acquire HubSpot (HUBS -3.36%), a company that makes marketing software. At the time, HubSpot was worth more than $30 billion, and if it were to go through, it would have been Alphabet’s largest-ever deal. Ultimately, however, that fell through.
More recently, Alphabet has been looking at buying another company called Wiz. It’s a fairly young cybersecurity business, founded in 2020. But with some impressive growth and many Fortune 100 companies being its customers, Alphabet was reportedly looking to offer $23 billion for the business. Alas, that deal also ended up falling through.
With deep pockets, Alphabet is looking around for buyout targets to enhance and diversify its business. And it could be a matter of time before the company is able to pull off a major deal. But I wouldn’t count on it happening this year, as even if Alphabet finds a company to buy, it may take time to obtain the necessary approvals from regulators — assuming they OK a large deal.
A big acquisition could strengthen its growth rate
Alphabet has made some modestly sized acquisitions in recent years, including its $2.1 billion purchase of smartwatch maker Fitbit in 2021 and its $5.4 billion acquisition of cybersecurity company Mandiant in 2022. While those deals have helped diversify Alphabet’s business, a much larger acquisition could have a more pronounced impact on the company’s financials. Although Alphabet’s quarterly growth rate has been rising by double digits, it is notably lower than its 10-year average.
GOOG Revenue (Quarterly YoY Growth) data by YCharts
For Alphabet to be able to justify its $2.1 trillion valuation and for the stock to continue soaring higher, it may need to find another lever to pull on so that its top line can accelerate at a faster pace, which could help attract more growth investors.
Alphabet may be in need of some diversification
A substantial acquisition could also help lessen the overall risk of investing in Alphabet. With chatbots answering queries in seconds and potentially driving some traffic away from Google Search, there’s the risk that a core part of its business may struggle in the future. Alphabet has its own chatbot, Gemini, but there are many others it potentially has to compete with, as tech companies are launching their own versions to ensure they don’t miss out on this new growth opportunity.
The danger is that there’s a lot riding on Alphabet’s search business, and that could be a problem if the company’s chatbot proves to be underwhelming compared to the competition. Last quarter, which ended on June 30, the company’s revenue totaled $84.7 billion, with its Google Search & Other segment accounting for $48.5 billion (57%) of the top line. An acquisition could make Alphabet much more diverse, and that could make it a safer buy amid expanding competition.
Should you buy Alphabet stock today?
Alphabet’s stock trades at 24 times its trailing earnings, which isn’t a steep multiple by tech stock standards. Although there’s some uncertainty as to what will happen with Google Search in the future, and what acquisition(s) Alphabet may end up pursuing, I’d feel comfortable buying and holding the stock for the long haul, despite the risk.
The company is in strong financial shape, and there’s a decent margin of safety with the stock, which makes it a more tenable investment to hold than other tech stocks. And with vast resources to tap into, I’m confident the company can find ways to expand into fresh areas to bolster its growth prospects.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and HubSpot. The Motley Fool has a disclosure policy.
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