Is Google’s Latest Acquisition Game-Changing?

Recently, it was announced that Google parent Alphabet Inc. (NASDAQ:GOOGL) was attempting to buy CRM provider HubSpot, Inc. (NYSE:HUBS). While this acquisition makes a lot of sense for GOOGL, it’s not going to be cheap. We examine what the potential acquisition means for GOOGL.

Alphabet Has The Fire Power To Snap Up Hubspot

Alphabet’s returns are not on par with its “Magnificent 7” counterparts. Over the past six months, the stock has surged by nearly 15%. However, the Roundhill Magnificent Seven ETF (NASDAQ:MAGS), which consists of Alphabet and the remaining enterprises in the Magnificent 7 cohort, has risen by more than 27% over the same time frame.

That may be about to change if Google snaps up Hubspot because Alphabet’s ad growth business has been stalling for some time, and this acquisition may be the growth catalyst needed to ignite the top line.

Although Google’s advertising revenues are still growing due to increasing user adoption, the rate has been decelerating for some time now.

In 2021, Google advertising revenues increased by 42.6% year-over-year to $209.50 billion. In 2022 and 2023, the same grew 7.1% to $224.47 billion and 6% to $237.86 billion, respectively.

On a more positive note, subscription revenue has been growing. Between 2021 and 2022, revenues from subscriptions, platforms, and devices grew by $1 billion, while Alphabet’s YouTube subscription services upsurge drove an increase of $5.6 billion between 2022 and 2023.

Adding to the reasons why Alphabet is a giant that cannot be stalled easily is the massive fire power it has on its balance sheet. Alphabet has $110.9 billion in cash, cash equivalents, and short-term marketable securities as of year-end 2023.

Unlike other big conglomerates and many of its tech contemporaries, Alphabet does not pay dividends, choosing to conserve cash that provides optionality to invest as it pleases. The bottom line is Alphabet has plenty of cash to make large acquisitions, such as Hubspot.

Hubspots Reignites Alphabet’s Revenue Growth

Reuters reported that Alphabet is consulting with advisors to potentially make an offer on Hubspot. If this deal goes through, it will be Alphabet’s biggest acquisition. Indeed, Hubspot is not a small company by any measure, now sitting with a market capitalization of over $34 billion.

It appears the strategic decision to buy Hubspot may be in direct response to GOOGL’s stalling ad revenue growth.

Hubspot is a highly regarded platform with its no-code approach to marketing, sales, operations and support for businesses. The company’s “inbound marketing” is ingenious because it targets customers with tailored messaging that better addresses their needs.

Over the years, the company has worked its way into being a large customer relationship management (CRM) platform.

As one of the largest companies that benefits from ad spend, Alphabet is an ideal match for Hubspot, not least because it gives the company access to a larger base of enterprise customers, and Hubspot’s strong financials make this deal even sweeter.

Hubspot Is a Great Acquisition

In FY 2023, Hubspot reported revenue of $2.17 billion, which was 25.4% higher than the prior year. While the company did not report a profit in GAAP terms, non-GAAP net income improved by 116.7% from the previous year and stood at $307.39 million.

In 2023, Hubspot carried out 800 enhancements across its platform, and this year, it has upped the ante with expectations of rolling out a seats-based pricing model.

The company anticipates the top line to be in the range of $2.55 to $2.56 billion in 2024 and has aims to become the top AI-powered customer platform.

It is clear what the upsides of the Hubspot deal would be to Alphabet’s portfolio, but what are the downsides of the purchase?

The biggest concern associated with the deal is the regulatory scrutiny Alphabet might face.

The Silicon Valley giant has regularly been in the crosshairs of the US government and the EU alike. In 2020, the U.S. Department of Justice filed an antitrust lawsuit on alleged monopoly charges against Google, and last year, a second one was filed, targeting Google’s advertising business.

At this time, big tech companies are not finding the regulatory environment favorable to make splashy acquisitions. U.S. and European antitrust regulators are reluctant to let any tech company get bigger through acquisitions.

On the other hand, this deal is unlikely to affect competition in the CRM sector. That’s because this market is already dominated by big companies like Salesforce, Inc. (NYSE:CRM), Microsoft Corporation (NASDAQ:MSFT), and Oracle Corporation (NYSE:ORCL).

With Alphabet’s name attached to Hubspot, the CRM provider may well find itself on a better footing against such formidable opponents.

Should You Buy Alphabet in Anticipation of This Acquisition?

Google’s position as the world’s top search engine risks the ire of antitrust litigators turning on it and scuppering its acquisition aims. Added to that is the fact that if this deal carries through, it’s going to be Alphabet’s biggest acquisition to date.

Its purchase of Motorola Mobility for $12.5 billion had previously been the biggest deal for the company so far. But that was a long time ago and it’s not like Google does not now have a much bigger cash pile, and ample reserves to both consummate the deal and leave ample in reserve.

As a result, there are numerous reasons for investors of both companies to be excited about a deal going through. Indeed, Alphabet’s valuation looks cheap. Its forward PEG ratio sits quite nicely at 0.99, indicating that earnings still have quite a lot of room for growth.

Moreover,30 of the 42 analysts providing ratings on Alphabet assess it to buy a Buy at this time and have a $165 price target on it, suggesting meaningful upside still.

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