On Wednesday, yours truly penned some thoughts about the best way for Apple (NASDAQ:AAPL) to deploy its jaw-dropping $245 billion cash hoard. But Apple is hardly the only outfit sitting on a mountain of money. As of the end of the third quarter, Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) boasts $115 billion in the bank, and the owners of GOOGL stock probably want the company to put some of that cash to work.
On the other hand, they clearly don’t want the company to make acquisitions just for the sake of making deals. But even the owners of Alphabet stock recognize there’s only so much upside to be reaped by reducing the number of outstanding shares of GOOGL stock. There comes a point where the smart and correct action is investing excess cash in a new growth engine.
Click to Enlarge
The question is, what sort of new growth engine or engines should GOOGL consider buying?
Apples And Oranges
The knee-jerk reaction might lead one to name Netflix (NASDAQ:NFLX) or Disney (NYSE:DIS),which I called on Apple to buy,as the obvious pickups for Alphabet, though they’re not necessarily the best fit for GOOGL.
The 1.4 billion active iOS devices represent a ready-made, loyal user base that’s eager to do more with its hardware. Alphabet, conversely, is still mostly a tollbooth to the internet, fielding roughly two-thirds of web queries in the United States.
While GOOGL is also the name behind Android, which powers more than 85% of the world’s smartphones, Android and iOS for mobile devices are like apples and oranges. Apple is only promoting devices it makes, so it controls the entire user experience. Google wants Android everywhere, and has made it easy for any developer to plug into.
AAPL has also already committed to selling entertainment that it has developed through its iTunes store. Alphabet has no experience or apparent interest in content creation.
As a result, neither Disney nor Netflix would be a smart fit for Alphabet.
So what takeover targets might be worth Alphabet’s money and time? Two surprising possibilities come to mind.
The Two Deals
To be clear, bolstering the stock-buyback program isn’t a poor use of Alphabet’s cash. It’s still in the midst of a more-than-$8 billion buyback of GOOGL stock that was announced early last year, in fact. don’t be surprised if that program is expanded when the company reports its fourth-quarter results after the close today.
If Alphabet really wanted to do something bold to build its business, though, it might want to acquire Square (NYSE:SQ), or FireEye (NASDAQ:FEYE), or both.
Don’t scoff until you hear me out.
You probably know about Square. It’s the company that turned the smartphone into a credit-card acceptance device with just a small, cube-shaped attachment.
It’s more than just a one-product outfit now, though. It’s developed what are essentially cash registers that also serve as customer-relationship and inventory-management devices. In the meantime, Square is slowly but surely morphing into a full-blown fintech company, an area where Google is falling behind.
SQ is also now the owner of website-building platform Weebly.
That needs to be repeated. Square now owns Weebly, which helps small businesses develop a web presence, and often, an e-commerce presence. Those businesses represent another swath of potential customers for Google’s ad business.
As for FireEye, it may not be as recognizable to consumers, but to enterprises that rely on the internet to conduct business and manage digital information, it’s a well-respected organization.
FireEye, in the simplest terms, offers a suite of cloud-based cybersecurity tools. It got off to a slow start, but its launch of a subscription-based product called Helix a couple years back has struck the right chord with its customers. Helix would be an easy bolt-on addition to Alphabet’s existing cloud services.
GOOGL could easily acquire both companies without blinking. Square’s current market cap is a relatively modest $29 billion, and FireEye has an even more affordable market cap of $3.5 billion. Not only would GOOGL stock not be diluted, but the bulk of Alphabet’s cash reserves would remain intact… even after including a premium in any offer.
Better still, both targets would soon make positive contributions to Alphabet’s operating earnings. FireEye is expected to swing to its first full-year profit when it finally posts its Q4 numbers, and Square is already profitable on a non-GAAP basis.
Looking Ahead for GOOGL Stock
Each deal would bring something to the table that Alphabet doesn’t already have, as well as bring something to the table that Alphabet could readily enhance. Potential synergies abound.
Unfortunately for the owners of Alphabet stock, neither deal seems likely to happen, as Alphabet’s preference is doing less rather than doing more. Most of its deal-making is reserved for smaller pickups that largely go unnoticed.
The company’s biggest deal of late was the purchase of some HTC assets in 2017, but even then, the $1.1 billion that GOOGL shelled out for the technologies that became the Pixel smartphone we know and love today was relative chump-change.
Still, it’s fun to hypothetically spend someone else’s money.
As of this writing, James Brumley held a long position in FireEye. You can follow him on Twitter, at @jbrumley.
