How Can Curbing Growth Capital Expenditure Impact Alphabet’s Stock Price?

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Alphabet

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
Google $ 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:

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Alphabet
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