Google parent Alphabet is in talks to acquire cloud security startup Wiz. If finalized, the proposed $23 billion buyout would not only be the largest in Alphabet’s history, but also the second largest in the cybersecurity sector, trailing only Cisco’s $28 billion purchase of Splunk in 2022.

The offer made by Alphabet is nearly double Wiz’s recent valuation of US$12 billion and a whopping 65 times the firm’s 2023 annual recurring revenue. ($350 million).

Speaking to InvestorDaily, Global X investment strategist Billy Leung pointed to multiple factors contributing to the significant difference between Wiz’s valuation and the proposed acquisition price, and suggested that similar undervaluation issues could affect other businesses in the cybersecurity sector.

"I think on the one hand, there's clearly a mispricing of common cybersecurity stocks, especially those in the U.S.," Leung emphasized.

"But number two, it's the scarcity value."

Specifically, Google is looking to significantly improve its cloud security capabilities by integrating Wiz's advanced technology. Leung explained that opportunities like those offered by Wiz are in short supply and as such are in high demand.

"There's also a rush to get into this kind of cloud security," he added, noting that by addressing its vulnerabilities, Google would improve its competitive advantage over Amazon's AWS and Microsoft's Azure cloud computing services, potentially attracting more corporate clients.

"Amazon has it, Microsoft has it, but Google doesn't, so Google is rushing in and saying, 'OK, we're a step behind right now and we need to make an acquisition to catch up,'" Leung said.

Despite the strategic rationale behind the acquisition, some online discussions have raised doubts about the reasoning behind the Magnificent Seven's acquisition strategy.

On a Reddit online forum frequented by investors, a user said: “Let's be honest, stagnant/large-cap companies are looking for startups/hype/growth. Many of them pay a premium, but like anything else that is scarce/hot technology or appropriate, rich valuations come with it, regardless of whether the buyer can continue its growth.

Another wrote: "Overpaying for a four-year-old company is not good for shareholders."

But also among Reddit users were those who defended Wiz, with one calling the company "10 steps ahead" of industry peers, adding "see the Wiz product in action and you'll totally understand why."

"A thousand paper cuts" in the industry

In a recent market outlook, Leung separately highlighted that the cybersecurity landscape is undergoing a "key transformation" fueled by growing awareness of cyber threats, stringent regulatory mandates and rapid technological advances.

"We are on the cusp of a major growth spurt, where the cumulative effect of many small incidents and revolutionary innovations is poised to catalyze significant growth—marked by what might be described as the proverbial 'thousand paper cuts,'" he wrote.

Above all, the increasing frequency and scale of cyber-attacks keeps these technologies at the fore, according to the market strategist. As the number of ransomware attacks has increased, so has the global damage, which is estimated to reach $30 billion in 2023. up from US$11.5 billion in 2019.

"High-profile breaches affecting large corporations and critical infrastructure have heightened the sense of urgency," he said.

Generative AI, Leung added, also increases the productivity of cyber professionals by automating tasks such as summarizing alerts and detecting threats.

“AI-driven solutions are expected to capture a significant portion of the market, potentially automating up to 50 percent of cybersecurity service spend. This change addresses the talent shortage in the industry and drives effectiveness in combating threats,” he stressed.

But AI can also be used to automate malicious activities.

“It is a double-edged sword; while AI provides powerful defensive tools, it also enables more sophisticated cyberattacks,” he warned.

Leung also pointed out that the transformation of the cybersecurity landscape is greatly benefiting companies like CrowdStrike, which are taking advantage of the increased need for security due to more remote work, use of the cloud and connected devices.

In particular, its focus on advanced threat detection and response is expected to drive significant growth, with annual recurring revenue projected to exceed US$4 billion over the next two years.

"These companies' strong strategies and innovative solutions highlight the growing investment opportunities in the cybersecurity industry."

“As the industry reaches its tipping point, now is the time to consider investing in cybersecurity. The growth potential of the sector and its critical importance in today's digital world make it an attractive investment case,” concluded Lung.