Good News on Google's CAPEX and Future FCF

Two positive points about Google's quarter that I haven't heard much talk about.

First, as Goldman analyst Anthony Noto picked up on the call, the Google Checkout promotion reduced Google's overall revenue in the quarter by 1% (because the promo is accounted for as contra-revenue).  No big deal, but another indicator of how strong the company's underlying unit growth is (clicks rose 22% sequentially vs. 19% for revenue).

Secondly, and more importantly, the peak quarters for CAPEX appear to be behind us.  CAPEX for the quarter was $367 million, down from $492 million in Q3 and $699 million in Q2.  The company's statement about future CAPEX, moreover, is that it will continue to be "significant"--a noteworthy change from mid- last year, when it said CAPEX would continue to grow "faster than revenue." 

A throttling back in CAPEX, combined with the anniversary of an accounting change that artificially depressed Free Cash Flow last year (a reclassification of the tax benefits for stock options), should lead to a major acceleration in FCF growth for 2007.  This is good news for shareholders, as FCF has essentially been flat for a year now--as has the stock.

This is not to suggest that the stock is not still expensive--it is.  It is just to point out that the flattish FCF and flattish stock price over the past year are probably linked and that investors usually groove on accelerating free cash flow.

[Reminder: I own Google through an index fund.] 

Comments

[Robert]

Anthony Noto of GS, the preeminent goog analyst, this morning raised his 2007 year end target price to 620 or 670 depending
on the PEG ratio one uses.

Comment: with the intsitutional ownership over 80 %, does anyone think that the
Google board will recommend a stock split due to the company's insistance on
openong the IPO to everyone.....including the "little guy."

[Henry Blodget]

I doubt it (stock split). I think they're going in the Warren Buffett mode.

[Robert]

re: goog stock split

Buffett has run Berkshire for almost 50 years and the institutional
ownership is still only 70 %, vs Google's 84 %. And Buffett's
charitable foundation will be selling shares in the next years.
I still feel that the founders of Google are veering from one
of their primary missions when they virtually exempt all but the
wealthiest individual investors. (Yes, I realize that one can buy
10 shares instead of a hundred.)

Also I would like to thank you for all you have done for me in this blog
and in your articles. Please do not succomb to the criticism of some.
We all make mistakes and you, in my mind, are making amends by
writing this free blog. I respect your opinions and hope you continue
for a long time.

[Sufiy]

Henry,

Do not you think that CAPEX was "Trimmed" in order just not to kill FCF totally for this year? Cash Flow from operations was down 9% from Q3. I remember you were talking about "normal" MC/FCF of 30, what about present MC/FCF=95 (!) All expences and TAC are rising and rate of growth is falling.

http://sufiy.blogspot.com/2007/02/google-vs-common-sense-cas_117033894397018453.html

Regards,

Sufiy.

[Anders Kargaard Jensen]

Thanks for great knowledge and a great blog Henry! It helps a lot of us with our investing..

[sufiy]

Henry,

What is your iedea about probability that Google has reached the saturation point and ternd in Daily Reach is down:

http://sufiy.blogspot.com/

It should put pressure on Key words pricing and hurt revenue growth further.

Regards,

Sufiy.

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[sohbet]

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