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Google: a $1trillion empire built on a simple idea

Ed Monk

Ed Monk - Fidelity Personal Investing

Google’s parent company Alphabet passed the $1trillion market cap mark last week, further cementing tech’s place at the top of the global business tree.

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There are now four US tech companies that have reached a stock market value of $1trillion - Apple, Amazon and Microsoft all got there first - but in many ways Google is the purest example of the digital phenomenon.

Those other tech giants all have one foot firmly in the real world; as producers of hardware like the iPhone in the case of Apple; as a mammoth shop window and delivery network in the case of Amazon; or as the manufacturer of software and operating systems in the case of Microsoft.

Google derives its profits mainly from advertising - which is no new industry, of course - but its method for doing that is wholly dependent on the internet and leverages Google’s unique position as de facto curator of the internet itself.

It’s dominance now can be traced back to its beginnings. When co-founders Larry Page and Sergey Brin (who have announced they will now step back from the company) registered the Google.com domain name in 1997 the world looked very different. The largest US companies by market cap then were General Electric, Coca-Cola and Exxon - only the presence of Microsoft in the top four would hint at the revolution to come.

Google’s great innovation, based on Page and Brin’s work as Stanford PhD students, was to rank internet pages not on how those pages described themselves, but on the other pages that linked to them. Understanding this meant that the Google search engine could rank many more pages, with more relevance, than other search engines. From that idea, all else has flowed.

The new heights being reached by the tech companies helps to explain the overall record level of the US stock market right now. Any optimism that the stock market can rise significantly further from here depends in great part on this small handful of remarkable companies continuing to defy the normal laws of commercial gravity.

Unlike those index-leading companies of the past which depended on established markets that could not suddenly expand, the tech giants have proved adept at finding new markets to disrupt and dominate. Just when you think they may have reached saturation point, along comes a new world to conquer.

Even at $1trillion in size, analysts are writing new higher target prices for Google - and some have predicted that the £2trillion milestone will be around the corner before too long.

Important information: The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Overseas investments will be affected by movements in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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