Google’s Capex Spending and the Impact on Stock Value

January 26th, 2011 by Trefis Team
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Google (NASDAQ:GOOG) traditionally competes with Microsoft (NASDAQ:MSFT) Yahoo (NASDAQ:YHOO), and AOL (NYSE:AOL) in the search advertising market.

Google recently announced its Q4 2010 earnings, in which the company noted a 5x increase in capital expenditures (capex) during 2010. Google attributes the increased capex spending to the New York City office space that the company bought in Q4 2010 for over $1 billion, in addition to the increased data center and operations spending. [1] Capex is a sensitive line item for our $603 price estimate for Google stock, which is in line with market price.

Google’s Capital Expenditures Over the Years
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Google’s capital spending has varied over the years. Google predictably cut down its spending during the recent recessionary phase. As shown below, Google’s capital spending declined at a fast rate from $2.4 billion in 2008 to $0.8 billion in 2009, and then shot back up to $4 billion in 2010. [2]

Google’s capex declined rapidly in 2009 as Google delayed the construction of its $600 million data center facility in Pryor, Oklahoma. [3] However, in order to manage expected increases in internet traffic, advertising transactions, new products and services, and to support its overall global business expansion, Google will need to increase its capital spending going forward.

[trefis_forecast ticker=”GOOG” driver=”0606″]

Google’s capex spending as % of EBITDA, a key metric that considers the company’s spending relative to operating earnings, declined rapidly from 41% in 2006 to around 10% in 2009 before jumping to 39% in 2010. While this parameter has been volatile in the recent past, we anticipate stabilization around 34% in the years ahead.

Although increased capex spending does position the company for long-term revenue growth, rapid capex expansion could limit upside to Google’s stock value. To highlight Google’s stock value sensitivity to this metric, we estimate a 6% downside to our $603 price estimate if capex as a % of EBITDA remains at 2010 levels of around 39% in the years ahead.

Drag the trend line in the modifiable chart above to see the affect of various capex spending scenarios on Google’s stock value.

You can see the complete $603 Trefis Price estimate for Google stock here.

Notes:
  1. See SeekingAlpha: Q4 2010 earnings conference call Q&A session [↩]
  2. Data available in Google earnings releases [↩]
  3. Datacenterknowledge, Google will delay Oklahoma data center, October 2008 [↩]