Wednesday, 22 April 2020

Google - Portfolio Addition



Following on from my foray into the US market and my acquisition of Microsoft earlier this month, I have now added Google's parent company Alphabet to my portfolio.

I guess everyone who uses the web will be aware of what Google does - it is responsible for over 90% of everything we search for. This dominant position means it can generate huge amounts of revenue from advertising - firms will pay handsomely for their product or service to appear at the top of the list of search results. We basically live in the Google age where information and data are sources of power and influence.

I used their Blogger facility to create my diy investor blog in 2013. I use their Gmail service (1.4 billion users) as well as many other offerings - Google Maps, Google Drive, Play Store to search and download apps, watch videos on YouTube etc. etc.

One example of their ubiquitous influence (one of many) is Spotify which claims to have changed the way we all listen to music. It is clearly very successful with over 250 million users, around half of whom pay a monthly subscription. But Spotify, like all but the very largest tech companies (Apple, Amazon), relies on Google to host its infrastructure. Every time you hit play on a song, Spotify pay a fee to Google. In other words, companies like Spotify can only exist and grow due to the infrastructure created by the dominant giants of this new technology age like Google.

Climate

Over the past few years Google has invested billions of dollars to make its operation more carbon neutral and now operates its vast multi-billion $ business entirely from renewable energy. That's taking 5 million tonnes of carbon out of the atmosphere every year - the equivalent of taking one million cars off the road.

Google is the world's largest corporate purchaser of renewable energy and have been working hard for several years to make their extensive data centres as efficient as possible. Whilst global demand for cloud computing has rocketed in recent years, this efficiency drive has resulted in no additional energy usage. Their data centres account for around 1% of global electricity use and all of this is from renewables. They claim to deliver seven times more computing power compared to just 5 years previously but with the same level of energy.

Here's their latest 2019 Environmental Report.(pdf)

In a recent development, Google have rolled out their Environmental Insight Explorer to around 100 global cities providing high resolution data to monitor greenhouse gas emissions and enable action to be taken to reduce CO2 emissions. 

Furthermore, the EIE team have analysed data from 3,000 cities to provide emissions insight from 95 million buildings and 3 trillion km of travel. They found that if these cities were to maximise their solar potential they could generate over 1,000 GW of renewable energy. It's with data like this that governments and cities can develop policies in conjunction with local communities and business to combat climate change.

It seems to me that Google are taking their climate responsibilities seriously however, like Microsoft, they have been criticised by the likes of Greenpeace for their relationship with big oil by providing AI and cloud technology to help locate better drilling sites.  Hopefully Google will iron out this apparently inconsistent position and pursue more sustainable deals.

Latest Results

The company has recently released strong results for the full year 2019. Revenues increased by 18% to $162bn - the lion's share was provided by Google search at $98bn with contributions of $15bn from YouTube ads and $9bn from Google Cloud.

The company is highly cash generative and has reinvested lots of this capital into building its cloud operation over recent years to compete with Amazon and Microsoft. The group finished the year with net cash of $115bn. They do not pay dividends but use some of the cash for share buybacks which benefits shareholders.

The shares have done well in recent years hitting an all-time high point of $1,500 in February before retreating sharply due to Covid-19. I added the shares to my ISA with AJ Bell at the price of $1,230 (£1,000 approx.) earlier this week. I expect further short term volatility but think the longer term outlook is very positive. In the light of the dramatic fall in global oil prices, I am hoping the likes of Google and Microsoft will start to review their ties with the oil majors such as Exxon and Chevron and decline deals which compromise progress towards net zero carbon emissions by 2050 in accordance with the Paris Agreement.

3 Yr Comparison v FTSE All Share Index
(click to enlarge)
The current coronavirus pandemic has resulted in stay-at-home lockdown for millions of people all around the world for several weeks, maybe months. Suddenly there is huge interest in tools that help us all to maintain contact, run a business from our bedroom and for video conferencing. Even our parliament has agreed to trial this new way of doing business. Google has been updating its platform Google Meet and integrating this with Gmail in response to the success of smaller rival Zoom. When these restrictions are lifted in the coming months, it's very likely that many businesses, organisations and people all over the world will want to continue with this new technology - we will see far more working from home, far more meetings conducted via online video. This will be yet another expanding market to boost the likes of Google and Microsoft.

Of course I already hold Google and Microsoft in my Polar Cap. Technology trust. Together they make up 17% of the trusts portfolio but as the trust only accounts for around 3% of my portfolio I wanted to increase my exposure with these individual shares.

The shares have rewarded holders over the past decade with a return of 400% which equates to an average of 17% each year. Whilst that is not likely to be repeated over the next ten years, I would not bet against it!

As ever, this article is merely a record of my personal investment decisions and should not be regarded as an endorsement or recommendation. Individual shares usually carry more risk than collective investments such as index funds - always DYOR!

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