Google Inc (GOOG): Capex To Return To Normal In 2-3 Quarters


Google Inc (NASDAQ:GOOGL) (NASDAQ:GOOG)’s capex has risen significantly since last year. Many investors are wondering when it will be over. Bernstein Research analysts Carlos Kirjner and Peter Paskhaver said in a research note that datacenter construction has been driving the capital intensity. The search engine giant has decided to expand its datacenter capacity well ahead of demand.

Datacenter capacity a strategic issue for Google

Responding to Bernstein Research’s question about capex, Google Inc (NASDAQ:GOOGL) (NASDAQ:GOOG) CFO Patrick Pichette said during the Q1 earnings conference call that having more datacenter capacity available has become a strategic issue for Google. If the demand spikes and sustains for a couple of quarters, and the company didn’t have the capacity, it would be a strategic mess. 

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As the images below show, Google Inc (NASDAQ:GOOGL) (NASDAQ:GOOG)’s capex relative to the revenue excluding traffic acquisition costs has almost doubled in the past few quarters. A look at the historical PP&E by category shows that the increasing capex has been due to heavy investments in construction, buildings and land. Meanwhile, the IT PP&E continues to grow at its usual 15%-25% rate.




Google’s capex may get even lower than 10% in the next 2-3 quarters

Bernstein Research says that it’s hard to figure out how much extra datacenter capacity Google Inc (NASDAQ:GOOGL) (NASDAQ:GOOG) plans to have. But analysts assume that the company wouldn’t want to have more than 50% of its capacity idle. The construction PP&E has increased from $2.24 billion in Q4 2012 to $5.88 billion in the first quarter of this year. Based on these two things, Kirjner and Paskhaver estimate that the capex will return to the normal levels of about 10% of revenue, excluding TAC, in the next two or three quarters. Or it could go even below 10% after so much datacenter capacity is deployed.

In its “momentum path” before the capex increase, Google Inc (NASDAQ:GOOGL) (NASDAQ:GOOG) was on way to have about $10 billion in lands and buildings PP&E in Q4 2015. Of that, $7 billion would be related to datacenter PP&E. That’s consistent with the historical level of about $2 billion in datacenter construction. Google’s total capex in the last four quarter reached $8.5 billion on revenues (excluding TAC) of $54.7 billion. Historically, its capex has been about 9%-10% of revenue.

Google Inc (NASDAQ:GOOGL) (NASDAQ:GOOG)’s class-A shares fell 0.76% to $532.23 at 1:04 PM EDT on Wednesday.