In September last year, a group of American lawmakers left an empty chair in their committee room having been shunned by Silicon Valley’s most powerful executive. Larry Page, co-founder of Google, declined an invitation to account for Big Tech’s inaction during the 2016 presidential election, when Russia spent millions on online advertising to sway voters.
The snub was no isolated event. Mr Page, 46, has been an absentee landlord at Alphabet, Google’s parent, for years. So it was little surprise that shareholders shrugged when Mr Page and Sergey Brin, 46, his fellow co-founder, stepped down last week.
Alphabet shares have risen nearly 5 per cent since then as investors bet that the $925 billion juggernaut would stay on its present course under Sundar Pichai. The executive will continue to run the Google division and takes charge of the Alphabet umbrella group, whose interests range from driverless cars to a speculative venture aiming to halt the ageing process.
Expect the status quo to survive as the founders switch to being non-executive directors. Mr Page and Mr Brin own 51 per cent of the voting shares, can hire and fire key executives and set Alphabet’s strategic course. Mr Pichai, 47, won’t be able to change direction without their say-so.
The founders may see little need to rock the boat. Since founding Google 21 years ago while studying for PhDs at Stanford University, the company has become the dominant internet search engine outside China, built YouTube into the world’s largest streaming video platform and created a lucrative cloud computing business. Alphabet has more than $120 billion in cash and, in the third quarter alone, generated revenues of $40.5 billion and made after-tax profits of $7.1 billion.
Its cash cow is a digital advertising business that made $31 billion of operating profit in the first nine months of the year. Historically, Mr Page and Mr Brin diverted a portion of these profits into blue-sky projects. The question for investors is whether Mr Pichai will prove more successful an investor than his predecessors. Save cloud computing, the company has failed to create a business of scale outside its advertising bailiwick. Its “moonshot” ventures will bring in $600 million of revenues this year, but will swallow $4 billion of capital. Alphabet discloses little on these businesses and it’s difficult to judge when, or if, any will pay off.
Of more immediate concern are the threats to the main source of Alphabet’s wealth. With Facebook, Google forms a duopoly in digital advertising, but regulators on both sides of the Atlantic have vowed to sap their powers. They have accused the pair of failing to stem the spread of disinformation and of trampling over users’ privacy. The European Union has fined Google more than €8 billion for breaking competition law. If European and American investigations force Google to limit how it gathers data, the financial damage would be greater still.
While Google battles more stringent regulation, competitors bite at its heels. Younger social networks such as Pinterest, a scrapbooking site, and Tiktok, a video-sharing app, are grabbing market share. Amazon casts an even more menacing shadow. More than half of US consumers go directly to the online shopping group when they search for a product. On this captive audience, Amazon is building a digital advertising business of genuine scale.
Over the past five years Alphabet shares have more than doubled. With rivals and regulators sharpening their knives, the rally will run out of steam.
ADVICE Avoid
WHY New competitors like Tiktok are growing their digital advertising revenues. And politicians have vowed to reduce Google’s market power
Water Companies
The plans of John McDonnell, the shadow chancellor, not merely to nationalise the water industry but to begin doing so within the first 100 days of a Labour government, yesterday became a commentary on the likelihood of the main opposition party being voted into power (Robert Lea writes).
Only three of the ten large regional water monopolies remain in publicly traded form on the stock market: United Utilities, formerly known as North West Water; Severn Trent, which supplies across the Midlands to Gloucestershire; and Pennon, whose South West Water subsidiary covers the West Country.
Yesterday United Utilities shares rose 7p to close at a two-year high of 870p; Severn Trent’s stock was up 31p at £22.80, not far from a two-and-a-half-year high; and shares in Pennon ended the session 2p to the good at 934¼p, not far short of overhauling the stock’s all-time high of 945p.
The City is plainly discounting any chance of Mr McDonnell reversing the privatisations of the Thatcher years and bringing the water industry back into public ownership. Investors are choosing, instead, to believe the opinion polls that put the Conservatives with a strong working majority of about 345 of the 650 Westminster seats.
More to the point, even if the Tory majority fails to materialise, the number of Labour seats would likely be so short that any attempt to cobble together a minority government would come with the price of Jeremy Corbyn’s head and policies like water nationalisation.
The three listed water companies have also risen on the back of next week’s scheduled five year price-capping determination by Ofwat. All three have been passed by the regulator already and should escape the worst of the expected cuts.
This has left the trio trading on historically high price-earnings multiples of about 16.
While corporate action could be on the horizon — takeover funds will be running the numbers and Pennon is to demerge its Viridor waste business — this is a sector caught in the eye of the climate change storm and future investments will need to be of the eye-watering scale.
ADVICE Hold
WHY They have likely escaped nationalisation but are fully priced
