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Google: 2013’s Top Tech Investment Lacks Flash but Mints Cash

Aaron Pressman
The Exchange
3 Things You Probably Don't Know About Google Adwords

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3 Things You Probably Don't Know About Google Adwords

Facebook (FB) and Twitter (TWTR) may have grabbed more of the tech headlines in 2013, but it was a less-flashy performer that made the most money for shareholders this year.

Google’s (GOOG) share price has gained a stellar 50% so far this year, adding about $120 billion to its total market cap of $354 billion, the largest increase of any U.S. tech stock, according to Factset. The $120 billion gain exceeds Facebook’s entire stock market value, two Hewlett Packards (HPQ) or five Twitters. Google's share price crossed $1,000 for the first time in October and currently trades within a few dollars of the all-time high of $1,068.

And Google did it the old fashioned way – by selling more advertisements on more websites than anyone else. Someday Google Glass, Google+ or self-driving cars may bring in a lot of revenue but in 2013, Google didn’t need any breakthroughs. And the company remains poised to keep on growing for the foreseeable future, whether its newly upgraded cloud service for businesses takes off or not.

A reliable trend

That’s because Google remains at the center of one of the biggest and most reliable global business trends: As more people spend more time online, advertisers continue to spend more to reach them.

Total revenue from digital ads at U.S. companies increased 15% last year and another 15% this year, to an estimated $42.3 billion, according to research firm eMarketer. And ad revenue is expected to grow another 13% next year and 10% the year after, exceeding $50 billion for the first time in 2015. The figures exclude so-called traffic acquisition costs, the portion of revenue Google and other ad networks pay to the sites that host the ads.

In recent years, despite the rise of mobile apps and social networks and all that, Google has consistently pulled in at least 40% of the total. Even as Facebook has come on strong, grabbing 7.1% of the revenue this year, Google’s share has grown.

The big question for Google entering the year, shared by many of its online advertising peers, was whether the increasing shift to mobile devices would divert its audience.

People using an app such as Yelp (YELP) instead of a Google search to find a restaurant don’t see any Google ads. And Apple (AAPL) has been increasingly turning away from Google for services on the iPhone. Google’s share of mobile ad revenue, the fastest growing segment of the market, had shrunk from 57% in 2011 to 48.2% this year.

But with Android phones firmly established as the leading mobile platform and a successful effort to get more advertisers to use mobile ads, Google has stabilized its share and proved it is up to the challenge. It's now projected to gain back several points of market share over the next two years.

A turnaround, a vindication

The turnaround vindicates Google’s strategy, unveiled in February, to overhaul its popular Adwords service and push more advertisers to add a mobile component to their campaigns. Using a feature called enhanced campaigns, advertisers could hone their advertisements more easily to appear in targeted ways depending on the viewer’s device, location and time of day. A dentist, for example, could run an ad that would let viewers click to call her office only on mobile phones and only when the office was open.

Advertisers pay less to advertise on mobile, and the amount Google collects on average, its cost-per-click, has declined. But it has more than made up for the decline with gains in the number of ads shown. In the third quarter, for example, the cost-per-click dropped 8% from a year earlier but the number of paid clicks jumped 26%. That’s a winning formula.

The Youtube video site has been a big help in that department. About 40% of viewers watch on mobile devices, up from 6% two years ago, and Google is including more ads on videos than it did in the past.

Google also gained this year because it benefits from most of the other leading technology trends, such as more-capable, cheap hardware and the rise of cloud services, that have decimated competitors.

Some critics decry Google’s acquisition of Motorola, but the 2011 purchase has yet to have a major impact one way or the other. Google paid $12.5 billion for the money-losing phone maker, though the acquisition target had $3 billion of cash on its balance sheet at the time and Google quickly sold off a set-top box division to recoup another $2.4 billion.

At the time, analysts were mixed on the deal and, despite massive cost cutting, the unit has yet to show a profit. This year came the first fully Google-designed smartphones, the well-reviewed Moto X and Moto G. But they have yet to make much of a dent in the market. And while some said Motorola’s patents alone justified the deal, they haven’t aided Google’s legal defense of Android.

Eventually, however, a turnaround seems likely. The new phones are appealing and Motorola only recently ramped up its marketing campaign as an AT&T exclusive on custom-color orders expired. Meanwhile, Google can easily absorb the Motorola losses with its huge $57 billion cash stock pile, up from $48 billion at the end of 2012.

But as long as the fundamentals keep clicking, Google shareholders will be satisfied.

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