Why Google Cloud Is Sneaky-Smart To Double Down On Security

As Russian tanks sweep across Ukraine, world political and business leaders are hardening their defenses for another kind of attack: Online.

Alphabet (GOOGL) announced on Tuesday that it would acquire Mandiant (MNDT), a maker of cybersecurity software. The $5.4 billion buyout will harden Google Cloud as the subsidiary expands its offerings.

It’s a big deal. Investors should consider buying Alphabet into the current weakness.

Google Cloud is at a make or break point. Its parent, Alphabet, has a strong history of winning the markets it enters. From Search to Android, YouTube, Chrome and Gmail, the Mountainview, Calif.-based company is known for its scale and prowess in machine learning. However, its cloud computing business is a minnow in a sea of whales.

Amazon Web Services, owned by Amazon.com (AMZN), and Azure, a subsidiary of Microsoft (MSFT) are both much larger than Google Cloud. They have larger ecosystems with legions of third-party software developers building atop their platforms. They also have most of the marquee government and corporate accounts.

Google Cloud is marching forward. Alphabet hired Thomas Kurian in 2018 to lead the cloud business. As an ex-Oracle Systems (ORCL) executive, Kurian brought a strong sales background.

In the fourth quarter Kurian helped grow Google Cloud revenues to $5.4 billion, up 45% year-over-year, according to documents filed with the Securities and Exchange Commission.

Now he’s adding Mandiant to fortify cybersecurity at Google Cloud. It will help the firm beef up what it offers to public and private sector firms that are asking for an artificially intelligent security layer to automate data.

Mandiant was founded in 2004 as Red Cliff Consulting by Kevin Mandia, a United States Air Force officer. After receiving funding from Kleiner Perkins Caufield and Byers in 2011 the business quickly scaled up. Revenues in 2012 grew to $100 million and the Reston, Va.-based company was under contract to many Fortune 100 firms and various government agencies.

The firm rose to fame in 2013 when its analysts directly implicated China in cyber espionage. Mandiant analysts also discovered in 2020 that hackers were using sophisticated malware to digitally sign certificates on the SolarWinds platform. The supply chain hack was the largest attack of its kind ever levied against U.S. government infrastructure. And the firm was contracted in 2021 by the Federal Bureau of Investigations to assist in the Colonial Pipeline ransomware attack. The FBI later confirmed that DarkSide, a Russian hacking group was responsible.

Cybersecurity has moved to the forefront of corporate and public sector life. Chief information officers are more aware than ever that attacks are likely to increase as the West ramps up financial sanctions against Russia to end its invasion of Ukraine.

Russia is considered to be one of the leading state-sponsors of malicious cyberthreats, according to a report on Digital Defense from analysts at Microsoft.

And a Gartner survey of CIOs in 2021 found that 88% plan to invest more to stave off cyberthreats.

Mandiant is the perfect vehicle for Google Cloud to make an end run at a total addressable market that could exceed $270 billion by 2026.

There is another reason to like Alphabet shares, though. The firm continues to grow quickly, it is expertly managed, executives are buying back shares hand-over-first to return capital to shareholders, and the firm will conduct a 20-for-1 stock split in June.

Alphabet reported in February that fourth quarter sales surged to $75.3 billion, an increase of 32% year-over-year. Profits grew to $21.9 billion, up 29% over the same time frame. Ruth Porat, chief financial officer, and a veteran of Morgan Stanley, announced in April 2021 that the firm would buy back $50 billion worth of stock.

At a price of $2,542 shares trade at only 18.7x forward earnings and 6.6x sales. These metrics are low for a firm of this size with 57% gross margins.

Investors should consider buying Alphabet shares into the weakness.

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