Google Reaches $1 Trillion in Value, Even as It Faces New Tests

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The internet search giant became the fourth tech company — after Apple, Amazon and Microsoft — to reach the market milestone.

 

SAN FRANCISCO — Numbers have long held a special significance at Google.

 

When the internet company was founded in 1998, it based its name on the mathematical term “googol,” which refers to the numeral 1 followed by 100 zeros.

 

When it filed to go public in 2004, it said it planned to raise $2,718,281,828, which was the sum of multiplying $1 billion with the mathematical constant “e.”

 

And in 2015 when it reorganized under a parent entity called Alphabet, it announced it would buy back shares worth $5,099,019,513.59, a figure derived from the square root of 26 — the number of letters in the alphabet.

 

On Thursday, Google hit another eye-popping number. The market cap of Alphabet vaulted above $1 trillion for the first time. That made it the fourth technology company — after Apple, Amazon and Microsoft over the past two years — to pass this once unimaginable valuation.

 

“So proud to see it hit the storied $1T market cap today!” Marissa Mayer, a former Google executive, said in a tweet on Monday, prematurely celebrating the milestone. She said she remembered when Google had raised money at a $100 million valuation in 1999, the year she became employee No. 20.

 

Google reached its latest numerical milestone as it is facing some of its biggest tests. The Silicon Valley giant is bidding adieu to its founders, Larry Page and Sergey Brin, whose love of math and disregard for Wall Street once embodied Google’s free spirit. Mr. Page, 46, and Mr. Brin, 46, said last month that they would step down from their executive roles.

 

As part of the transition, Sundar Pichai, a longtime deputy who has been Google’s chief executive since 2015, took the reins of what has been a changing company. While Mr. Page and Mr. Brin once said Google was not a conventional corporation, it has become just that in recent years.

 

Aiming to get a handle on its rising scale and size, Google has brought on professional managers like Ruth Porat, its chief financial officer, who joined from Wall Street in 2015. It also increasingly paid attention to curbing costs and monitoring the financial viability of its so-called moonshot projects, like self-driving cars or hot-air balloons that provide internet connectivity.

 

Google has also crammed more advertising onto the top of search results and squeezed money out of businesses like YouTube. And it has pushed aggressively into wooing corporate customers for its cloud computing business, putting it into the kind of lucrative but boring business that early Googlers once sneered at.

 

All the while, Google’s unique and freewheeling corporate culture appears to be crumbling. Activist employees have complained that Google is cracking down on workers who speak out on issues such as the company’s treatment of sexual harassment or working with the American military on technology that could be used to improve weapons.

 

Last year, Google fired several employees active in labor organizing for what it described as “clear and repeated violations of our data security policies.” It has also been working with a firm known for helping companies fend off unions.

 

Jack Poulson, a former research scientist who left Google in 2018, said the company’s focus on maintaining growth and keeping Wall Street happy had changed its character.

 

“The ethical lines are being rolled back,” said Mr. Poulson, now the executive director of Tech Inquiry, a nonprofit that helps tech workers raise ethical concerns about products they are working on. He said he had resigned from Google to protest the company’s efforts to introduce a search engine in China that would adhere to the Chinese government’s censorship requirements. (Google has said there are no current plans to launch its search engine in China.)

 

Google faces other challenges. Regulators and lawmakers around the world are scrutinizing the company for vacuuming up people’s private information and chilling the technology landscape with its market dominance. In the United States alone, it faces investigations from Congress, state attorneys general and the Department of Justice.

 

The company will also be under the spotlight this year with the American presidential election. It has grappled with criticism over how it allows politicians to target specific audiences with digital ads, a practice that it recently scaled back. The company is also scrambling to prevent misinformation spreading on YouTube and Google search results, as it did in the 2016 election.

 

These issues now fall on the shoulders of Mr. Pichai, 47, a former McKinsey management consultant who has proved adept at handling the traditional executive functions — like earnings conference calls with Wall Street analysts — that Mr. Page and Mr. Brin spurned. Yet he is often described as lacking the visionary chops of the company’s founders.

 

For all the changes facing Google, one constant has remained: It is essentially the sole proprietor of the internet’s most lucrative business. Google search is the on-ramp to much of the internet, and placing advertising next to key search terms is a necessity for most businesses, who risk forgoing traffic to a competitor.

 

The company marches upward in market value as it continues hauling in $137 billion (and growing) in annual revenue, much of it from its healthy digital advertising business.

 

And despite growing consumer and government animosity toward tech companies, the stock prices of the major players continues to soar. The S&P 500 tech sector ended 2019 up nearly 50 percent, with Alphabet shares rising 28 percent in the year.

 

“We see the same headlines, but we don’t see that show up on the results,” said Ron Josey, an analyst at JMP Securities who follows the company. “At the end of the day, it’s the numbers that are talking.”

 

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Big Tech is worth over $5 trillion now that Alphabet has joined the four comma club

Key Points

• Alphabet became the fourth U.S. tech company to reach $1 trillion in market value, after Apple, Microsoft and Amazon, which has since dipped below that mark.
• The five most valuable U.S. tech companies now account for over 17% of the S&P 500, up from 11% in 2015.
• Even in the face of heightened regulatory pressure, the dominant companies continue to grow and attract investor dollars.

Even as regulators bear down on the top technology companies and some lawmakers seek to break them up, Big Tech is bigger than ever.

 

On Thursday, Alphabet topped $1 trillion in market value, becoming the fourth U.S. technology company to reach that level, after Apple, Microsoft and Amazon, which has slipped back to about $930 billion.

 

Adding Facebook into that group, the five most valuable U.S. tech companies are now worth a staggering $5.2 trillion, accounting for over 17% of the S&P 500, according to FactSet. That's up from 11% five years ago, with about two-thirds of the value, or $3.5 trillion, accruing over that stretch.

 

Whether at home or in the workplace, the same companies are surrounding us like never before, capturing our attention and increasing amounts of spending from businesses, consumers and advertisers. With all that momentum, investors are mostly shrugging off news of probes by the Department of Justice, Federal Trade Commission and state law enforcement into the potential anti-competitive practices of Big Tech as well as declarations by presidential candidates Elizabeth Warren and Bernie Sanders that the companies should be split apart.

 

Specific to Alphabet, state attorneys general are investigating the dominant search business and the company's Android operating system, which comes with numerous Google apps pre-installed. Google has continued to thrive despite billions of dollars in past fines from the European Union, while privacy-related regulations like Europe's General Data Protection Regulation have generally worked in Google's favor and hurt smaller businesses that have fewer ways to adapt and gather data.

 

"They have the resources and means to be able to meet those needs whereas not every competitor can do that," said Kevin Walkush, a portfolio manager at Jensen Quality Growth Fund, which oversees about $8.5 billion and counts Alphabet, Microsoft and Apple among its top holdings. For Google, "it has headline risk, but we think they have the resources to meet whatever regulatory hurdles they face. There's a high likelihood that they could come out better," Walkush said.

 

Google also had to overcome an abundance of internal turmoil. The company faces an investigation into how executives handled claims of sexual harassment and other misconduct as well as worker protests related to mistrust of leadership and the ways they've fired certain employees.

 

None of that has impeded Alphabet's climb to $1 trillion. The stock rose 0.8% to $1,450.16 on Thursday, and is now up 33% in the past year. Apple, the most valuable U.S. company, has been the top performer in the group, jumping 103%, with Microsoft and Facebook each up over 50%.

 

Ads still account for almost all of Alphabet's revenue, but the company is investing heavily in cloud infrastructure, where it's generating over $8 billion in annualized revenue and is third to Amazon and Microsoft. Under the leadership of former Oracle executive Thomas Kurian, Google Cloud has been bulking up through hiring and acquisitions, including the $2.6 billion purchase last year of data analytics company Looker.

 

Google's most recent billion-dollar deal wasn't in online ads or cloud computing. In November, it announced the $2.1 billion purchase of smartwatch maker Fitbit, whose stock price has been crushed in recent years amid competition primarily from the Apple Watch. The Justice Department will reportedly review the deal.

 

Another consumer electronics company that's struggled for similar reasons is home speaker maker Sonos, which is being pummeled by the proliferation of lower-cost devices from Amazon and Google.

 

Sonos sued Google last week for patent infringement. The complaint alleges that Google copied Sonos' technology for wireless speaker systems while the two companies were working together as early as 2013. Google disputes the claims.

 

The bigger story Sonos tells in the filing is one that surely resonates with thousands of smaller tech companies struggling to survive in a world where Google, Amazon and Apple can sell products at a loss, killing competitors along the way while sucking vast amounts of data into their orbit.

 

In Sonos' words:

 

The harm produced by Google's infringement has been profoundly compounded by Google's business strategy to use its multi-room audio products to vacuum up invaluable consumer data from users and, thus, further entrench the Google platform among its users and ultimately fuel its dominant advertising and search platforms. In furtherance of this strategy, Google has not merely copied Sonos's patented technology, it has also subsidized the prices of its patentinfringing products, including at the entry level, and flooded the market. These actions have caused significant damage to Sonos.

 

Even with Alphabet expanding its enterprise software business and building up its roster of gadgets, the ad division continues to chug along and pump out cash. Advertising revenue climbed 17% in the third quarter to $33.9 billion, and Google is gearing up for an event-filled 2020. Mark Mahaney, an analyst at RBC Capital Markets, told CNBC this week that the upcoming presidential elections along with the Summer Olympics in Tokyo and UEFA Euro 2020 (the European soccer tournament) will help drive results for Google and Facebook, the leaders in online ads.

 

"This is a big year for global advertising," said Mahaney, who has a buy rating on both stocks. "All those are big advertising events. There are two companies I look at — Facebook and Google — that are clear derivative plays off that. Fundamentally, we think they're really well set up for the year and the quarter."

 

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