How Can Curbing Growth Capital Expenditure Impact Alphabet’s Stock Price?
Alphabet Inc. (NASDAQ:GOOG) continues to invest heavily in systems, data centers, real estate and facilities, and information technology infrastructure. Over the past six years, the company has spent nearly $39 billion in capital expenditure (CapEx). As a percentage of revenues, the CapEx has fluctuated between 13.5% and 16.7%. Most of this CapEx has been growth as the company continues to strive for an increase in topline. The table below illustrates how the CapEx has fluctuated in absolute terms over the past six years.
Year | Units | Value |
2010 | $ Bil | 4.02 |
2011 | $ Bil | 3.44 |
2012 | $ Bil | 3.27 |
2013 | $ Bil | 7.36 |
2014 | $ Bil | 10.96 |
2015 | $ Bil | 9.92 |
Total | $ Bil | 38.96 |
The driver below illustrates how the capital expenditure (as a % of revenues) has waxed and waned over the past six years.
While most of the capital expenditure has been related to Google and its ads business, capital expenditure related to other bets have gone up recently as the company expands its operations to other business vertical such as Google fiber and improving human life expectancy. The following table shows this trend.
CapEx | Units | 2013 | 2014 | 2015 |
$ Bil | 7.00 | 11.17 | 8.85 | |
% Of Total CapEx | % | 95.21% | 101.95% | 89.25% |
Other Bets | $ Bil | 0.19 | 0.50 | 0.87 |
% Of Total CapEx | % | 2.54% | 4.57% | 8.76% |
Reconciling Items | $ Bil | 0.17 | -0.72 | 0.20 |
Total | $ Bil | 7.35 | 10.96 | 9.92 |
As a result of this capital expenditure, Alphabet’s free cash flow to the firm have been suppressed, as shown below:
Free Cash Flow To For The Firm | Unit | Value |
2010 | $ Bil | 8.90 |
2011 | $ Bil | 10.20 |
2012 | $ Bil | 13.98 |
2013 | $ Bil | 13.90 |
2014 | $ Bil | 12.69 |
2015 | $ Bil | 18.52 |
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Based on these trends we project that the CapEx (growth and maintenance) in the ensuing years will be as follows:
Year | Unit | CapEx | CapEx As A% Of Revenue | FCF |
2016 | $ Bil | 11.60 | 13.2% | 19.38 |
2017 | $ Bil | 12.60 | 13.1% | 20.80 |
2018 | $ Bil | 13.69 | 13.1% | 22.41 |
2019 | $ Bil | 15.02 | 13.1% | 23.81 |
2020 | $ Bil | 16.88 | 13.1% | 25.91 |
2021 | $ Bil | 18.62 | 13.1% | 27.71 |
2022 | $ Bil | 19.81 | 13.1% | 28.03 |
2023 | $ Bil | 21.67 | 13.1% | 29.17 |
However, if the company were to undertake only maintenance CapEx, its free cashflow would be market better as shown below:
Year | Unit | CapEx | CapEx As A% Of Revenue | FCF | Increase |
2016 | $ Bil | 9.89 | 11.25% | 20.88 | 1.49 |
2017 | $ Bil | 9.82 | 10.25% | 23.22 | 2.42 |
2018 | $ Bil | 10.16 | 9.75% | 25.48 | 3.07 |
2019 | $ Bil | 10.58 | 9.25% | 27.68 | 3.86 |
2020 | $ Bil | 10.93 | 8.50% | 31.08 | 5.17 |
2021 | $ Bil | 11.01 | 7.75% | 34.34 | 6.63 |
2022 | $ Bil | 10.58 | 7.00% | 36.06 | 8.03 |
2023 | $ Bil | 10.35 | 6.25% | 39.03 | 9.86 |
This can lead to a 25% upside to our estimate of Alphabets’ stock price.
Have more questions about Alphabet? See the links below:
- What’s Alphabet’s Fundamental Value-Based On 2015 Results?
- By What Percentage Did Alphabet’s Revenue And EBITDA Increase In The Last Five Years?
- How Has Alphabet’s Revenue Composition Changed Over The Last 5 Years?
- By What Percentage Can Alphabet’s Revenues And EBITDA Grow In The Next 3 Years?
- How Much Are Advertiser Paying For Internet Users In Rest Of The World To Google?
- How Much Are Advertiser Paying For The US Internet Users To Google?
- What Was The Estimated Desktop Revenue Per Search For Google In 2015?
Notes:
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