Alphabet Is Betting Big on Cybersecurity — What It Means for Investors

First Google parent Alphabet ( GOOGL 2.25% )( GOOG 2.14% ) reported an upcoming 20-for-1 stock split, and now Amazon is following suit. Though a stock split does little to affect ownership of a company (save for some psychological effects when investors view a smaller share price), the news has nevertheless captured plenty of headlines.

A much bigger shred of news coming from Google has been all but buried by the upcoming stock split: Alphabet is acquiring cybersecurity platform Mandiant ( MNDT 0.53% ) for $5.4 billion, which it will add to its Google Cloud segment. Given the fast and steadily rising cost of cybercrime, this is a really big deal.  

Cybercrime is a seven-figures-per-incident problem

Google's acquisition of Mandiant is simple enough. Purchasing Mandiant is chump change for the internet search and advertising giant, which reported having nearly $140 billion in cash and short-term investments at the end of 2021 (offset by just $14.9 billion in overall debt). The $5.4 billion price tag includes the $2.19 billion in cash and short-term investments Mandiant reported having (plus $1.01 billion in debt).

But of all the companies out there Alphabet could acquire and add to its Google Cloud segment, why Mandiant? A cybersecurity play makes perfect sense. The frequency of cybercrime incidents is on the rise. The Identity Theft Resource Center said data breach incidents were 23% higher than the previous all-time high in 2021. The average cost to a company experiencing a successful attack was also up substantially. According to IBM's annual Cost of a Data Breach 2021 report, the global average cost of a data breach incident was up 10% to $4.24 million last year. In the U.S., the average cost per incident was a whopping $9.05 million.

Google Cloud frequently touts tight security as one of its top priorities when competing against other public cloud heavyweights Microsoft Azure and Amazon AWS. Adding Mandiant to the mix could be a key differentiator. As a reminder, Mandiant was formerly known as FireEye, undergoing a rebrand last October after selling its products business to cybersecurity peer McAfee Enterprise.

What remains under the Mandiant name is a cloud-based subscription platform that helps users automate security investigations into potential attacks, and map out an organization's security network to find weak points. In the fourth quarter of 2021, half of Mandiant's revenue was subscriptions, and half was from professional services helping customers investigate attacks and shore up defenses.  

What Google Cloud gets in the deal

Mandiant's management team had said it expects 2022 revenue growth of at least 15% to $555 million. Based on this, Alphabet is paying about 7.5 times enterprise value to expected 2022 revenue -- a premium considering growth stocks that generate little to no profitability are out of favor right now (like Mandiant, which is expecting adjusted operating losses in the next year, although it did generate positive free cash flow in 2021).

But this is clearly a long-term bet, and not just from a financial perspective. Google Cloud and Mandiant will create an "end-to-end security operations suite" for users of the cloud platform. And while Mandiant is far from one of the largest names in the cybersecurity industry, it won't be a meaningless addition. Google Cloud hauled in $19.2 billion in total revenue last year, which would put Mandiant's 2021 revenue at about 2.5% of the public cloud segment.

In an era where cybersecurity is quickly growing into a top priority, Google is taking serious steps to bolster its security capabilities. That could pay off in a really meaningful way in the years to come as companies migrate their operations to the cloud -- but simultaneously need new tools to keep those operations safe from those with nefarious intentions.

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