How Did Google Stomp the Market In 2013?


Google has totally crushed the market in 2013. Shares of the online search and advertising giant have soared over 50% higher year to date, leaving the S&P 500 and all of its major rivals behind.

How did Google pull off such a rewarding year?

First of all, Google's gains in 2013 weren't pulled out of thin air. Investors actually reacted to years of quiet growth that had gone unrewarded. Check out Google's revenue and earnings growth over the last five years:

GOOG Chart
GOOG Chart

GOOG data by YCharts.

These trends continued in 2013. Google is currently growing sales at a 24% annual run rate while net income is back to double-digit growth. This is the new normal for Google, following a 2012 where revenue growth was boosted but earnings held back by the $2.5 billion buyout of Motorola Mobility.

The handset builder came in with respectable revenue but negative operating income, and these metrics really haven't changed under Google's tutelage. This is one area where Google could stand to improve its otherwise excellent operations. In the recent third-quarter earnings call, Google CEO Larry Page said that Motorola's product quality has improved since Google took over the reins, but the distribution model needs a serious overhaul.

But Google makes up for its disappointing Motorola results elsewhere. There are over 1 billion Android devices in the world, driving mobile search traffic to the Google ecosystem. YouTube's pre-roll video ads are growing 75% year over year and 40% of YouTube's video traffic goes to mobile devices. The cost per click on Google-hosted ads is shrinking slightly, but volume is exploding. The company may have reversed that dynamic in recent weeks, thanks to a couple of margin-friendly tweaks to Google's advertising platform.

Heading into 2014, Google shares are trading at just 21 times forward earnings. It's not the kind of deep-discount ratio that makes value investors drool in their sleep, but then Google isn't exactly a stale growth story, either. Just ask the master investors of our Rule Breakers newsletter team, who have tapped Google twice in recent years -- and would still not mind buying more.

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