What Wiz’s Rejection of Google’s Acquisition Means

Wiz’s decision to reject Google’s $23 billion acquisition offer in favor of an IPO has sent shockwaves through the cybersecurity industry.¹ This bold move not only highlights the immense potential of cybersecurity firms but also presents compelling reasons for investors to take notice. Here’s why Wiz’s strategy is a pivotal moment for cybersecurity IPOs and what it means for the investment landscape.

Bull Case for Cybersecurity IPOs

1. Market Validation and High Valuation: Google’s willingness to pay 46 times Wiz’s forward revenue underscores the immense value that cloud security companies hold for major tech firms and should hold for public market investors, given their growth potential.² This not only validates Wiz’s business model but also signals to investors the high growth prospects within the cybersecurity sector​.
2. Investor Confidence and Growth: Wiz, a venture-backed company, has demonstrated phenomenal growth since its inception in 2020. Receiving its seed check in early 2020, Wiz has rapidly expanded to achieve $500 million in ARR³ within 4.5 years.⁴ The rejection of Google’s offer indicates that Wiz’s shareholders believe the company holds significant intellectual property and intrinsic value, further enhancing investor confidence​.
3. Robust Revenue Growth and Industry Potential: Wiz’s rapid growth trajectory—reaching $500 million in ARR within 4.5 years—demonstrates strong business fundamentals and market demand.⁵ This growth illustrates the industry’s huge potential, despite recent muted investor sentiment. As the world becomes more digital, dynamic approaches to security threats are crucial, and this dynamism is evident in the cybersecurity industry​.

Assaf Rappaport’s Leadership

Assaf Rappaport, the co-founder and CEO of Wiz, has demonstrated exceptional leadership in guiding the company through rapid growth and significant strategic decisions. His choice to pursue an IPO rather than accept Google’s substantial acquisition offer is a testament to his confidence in Wiz’s potential and his vision for the company’s future. Rappaport’s strategic acumen is further highlighted by his previous success with Adallom, which he sold to Microsoft in 2015, showcasing his ability to create and scale successful cybersecurity ventures​.⁶ Rappaport’s focus on achieving $1 billion in ARR before considering an IPO reflects a disciplined approach to growth and value creation.⁷ His belief in the strength of Wiz’s team and their ability to innovate and compete in the dynamic cybersecurity market underscores an insider’s confidence not just in his product/solution but also in the growth opportunities still existing in an industry that many investors believed had matured​.

Positive Signal for Cybersecurity IPO Pipeline

Wiz’s confidence in its ability to compete organically and pursue an IPO sends a strong positive signal about the cybersecurity IPO pipeline. The choice to reject consolidation into a larger entity like Google suggests that the cybersecurity sector is not yet ready for consolidation into a small number of dominant players​.

What Investors Should Consider

Such dynamism means that picking individual winners in the cybersecurity space can be challenging, as the landscape is continually evolving with new threats and technological advancements. For investors, a diversified approach to investing in cybersecurity, such as through a diversified cybersecurity ETF, is a sensible strategy.

Valuation Disparity and Investment Opportunity

We note a significant disparity in valuation between private cybersecurity companies and their public counterparts. Google valued Wiz at 46 times its future revenue, whereas public cybersecurity companies like CrowdStrike currently trade at around 47 times their free cash flow.⁸ This valuation gap has been exacerbated by a broader sell-off in the cybersecurity industry following the CrowdStrike incident. Historically, valuation convergence between public and private markets has been observed in the cybersecurity sector. This disparity presents an attractive entry point, suggesting considerable upside potential in public cybersecurity equities for investors looking to capitalise on growth and innovation within the sector​.