Google (NASDAQ: GOOGL) can’t buy its way to growth
Google parent Alphabet (NASDAQ: GOOGL) is already the third largest provider of cloud computing services, but a failed acquisition bid is showing just how hard it will be for the company to pull ahead of larger rivals Amazon (NASDAQ: AMZN) and Microsoft (NASDAQ: MSFT) in the quickly growing space. With numerous antitrust lawsuits and investigations looming, the company is facing intense scrutiny that’s unlikely to die down anytime soon.
Cloud offerings accounted for 44% of Microsoft’s overall revenue in its latest quarter and 17% of Amazon’s, but the sector accounted for only 12% of Alphabet revenue. That’s why news last month that the company was prepared to spend $23 billion to acquire cloud cybersecurity startup Wiz was widely heralded, especially as an effort to diversify away from its reliance on online advertising. The deal would have been the largest purchase for Alphabet ever, but it fizzled out as quickly as it emerged.
Wiz, founded by four former members of the Israel Defense Forces, appears to have been concerned about antitrust approval and decided to pursue an IPO instead, rejecting the offer that would have doubled the valuation it received only months ago. The US Department of Justice sued Alphabet in 2020 over allegations it illegally monopolized search engine markets, and a judge is expected to issue a final ruling in the coming months. The company is also facing a separate antitrust case over its digital advertising practices that will go to trial in September. Across the pond in the UK, meanwhile, competition authorities said this week that they are investigating Alphabet’s $2 billion investment into AI startup Anthropic.
Alphabet shares have largely tracked declines seen across the tech sector over the past month, declining 6.5%. And while the company reported solid gains in revenue and profit in the second quarter, investors seem to be holding their breath to see if heavy spending on AI endeavors start to produce any actual results. CFO Ruth Porat said Alphabet would be investing more than $12 billion a quarter, well above levels seen in previous years.
“The risk of underinvesting is dramatically greater than the risk of overinvesting for us,” CEO Sundar Pichai said during an earnings call last week. “We are at an early stage of what I view as a very transformative area. And in technology, when you are going through these transitions, aggressively investing upfront in a defining category…is definitely something that for us makes sense to lean in.”
Alphabet may now be in a spot where it’s forced to spend big or risk falling further behind. Aswath Damodaran, a finance professor at New York University’s Stern School of Business, argues that tech booms tend to create “only a few big winners, but many wannabes, losers, and market chasers who are forced to invest in the new technology merely to keep up.” With a cash hoard of more than $100 billion, Alphabet has certainly got a shot at trying. It just may need to take the more risky path of spending on its own instead of acquiring proven assets, as it’s becoming increasingly clear that the company won’t be able to buy its way to growth.
