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.
Carlson Capital's Double Black Diamond Fund posted a return of 3.3% net of fees in August, according to a copy of the fund's letter, which ValueWalk has been able to review. Q3 2021 hedge fund letters, conferences and more Following this performance, for the year to the end of August, the fund has produced a Read More
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.