Google Inc (NASDAQ:GOOGL) (NASDAQ:GOOG) has not been afraid to dip into its deep pockets to invest in the future. However, analysts at Cantor Fitzgerald say a decline in capital expenditure efficiency has lead them to question how Google’s most recent investments can be monetized. Nonetheless, they remain Buy-rated on Google with a target price of $630 per share because of the strength of the company’s core businesses and also its valuation.

Looking for more transparency in Google’s capex

In a report dated June 9, 2014, analysts Youssef Squali, Naved Khan and Kip Paulson took a closer look at Google Inc (NASDAQ:GOOGL) (NASDAQ:GOOG)’s recent capital expenditures. They noted that there was a 23-fold increase in capital expenditures compared to a 22-fold increase in revenues. The analysts say it’s time for Google to be a bit clearer about what it’s doing with its money. They believe it’s unclear whether the search giant’s increasing investment level will result in positive risk-adjusted returns going forward.

The Cantor Fitzgerald team reports that when Google Inc (NASDAQ:GOOGL) (NASDAQ:GOOG) went public in 2004, capital expenditures made up about 16% of its net revenues. At the time, the company was spending mostly on computing equipment and real estate because most of the business was still focused on paid search.

Since then, the company’s capital expenditures rate has ranged from 4.6% in 2009 up to 26.1% in 2006. However, dollar-wise, they say capital expenditures have risen 23-fold over that time frame, although there isn’t any apparent operating leverage.

Google’s capex efficiency wane

The analysts compared Google Inc (NASDAQ:GOOGL) (NASDAQ:GOOG)’s capital expenditure spending to its revenue growth and also to that of its peers. They say that compared to its peers, Google’s efficiency in capital expenditures is beginning to wane.

The analysts found that Google Inc (NASDAQ:GOOGL) (NASDAQ:GOOG) had less revenue growth compared to its level of capital expenditures over time. Only Yahoo! Inc. (NASDAQ:YHOO) and AOL, Inc. (NYSE:AOL) spent less efficiently for growth.

Google Rev CapEx

In terms of how capital expenditures stacks up as a percentage of revenue for Google Inc (NASDAQ:GOOGL) (NASDAQ:GOOG) and its peers, they found that Google’s “right in the middle of the pack.” They note that this isn’t surprising because the company “has become a benchmark” for other Internet companies.

Google Capex

Google’s operating margins hurt

Squali and the rest of the team at Cantor Fitzgerald report that Google Inc (NASDAQ:GOOGL) (NASDAQ:GOOG)’s return on equity fell by 110 basis points to 17.2% last year, compared to 18.3% the previous year. By using a DuPont analysis of the numbers, they saw that a lower operating margin was the main cause. The analysts do note that a lower effective tax rate partially offset the lower margin, but that margin has been declining for some time.

The analysts say Google Inc (NASDAQ:GOOGL) (NASDAQ:GOOG)’s operating margins were 50% in 2005 but down to 36% in 2013, excluding Motorola. They said a mix shift in revenue to Display and Other, which has lower margins and higher depreciation, was likely the main driver of that decline in operating margins. They say this is probably related to higher capital expenditures.

Unclear how Google will monetize latest plans

The Cantor Fitzgerald team said they do admire Google Inc (NASDAQ:GOOGL) (NASDAQ:GOOG)’s long-term mindset. They said they’ve “been big proponents” of the company’s “large calculated investments” targeted at expanding its total addressable market and strengthening “its competitive moat. They cite the Android operating system and Doubleclick and YouTube acquisitions as examples.

However, they say that Google Inc (NASDAQ:GOOGL) (NASDAQ:GOOG) made these investments to support “models with relatively transparent monetization potential.” That’s not the case with the search giant’s newest investments, like the self-driving car, Google Fiber, robotics, and other areas. They believe that more transparency will be needed in terms of “the viability of the investments” as well as their long-term operating leverage.