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Google's Capital Expenditures Skyrocketed in 2018

By Evan Niu, CFA – Updated Apr 11, 2019 at 11:40AM

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The search giant invested over $25 billion in its business last year.

Alphabet (GOOG 1.56%) (GOOGL 1.90%) reported fourth-quarter earnings last night, and rising costs held back profitability. Subsidiary Google continues to plunge massive amounts of money into the Google Cloud business in an effort to catch up to rivals (AMZN 3.04%) and Microsoft (MSFT 0.07%) in the booming cloud infrastructure market. Alphabet's capital expenditures for 2018 skyrocketed, nearly doubling to $25.1 billion, with Google spending the vast majority of that total.

The search giant is also hiring aggressively, adding roughly 4,400 workers during the quarter. CFO Ruth Porat added that "the most sizable head count increases were in Cloud, for both technical and sales roles."

Chart showing Google capital expenditures in 2016, 2017, and 2018

Data source: 10-K. Chart by author.

Google Cloud hits a new milestone

While Google does not directly disclose Google Cloud Platform (GCP) revenue, the platform was one of the growth drivers for Google other revenues, which jumped 31% to $6.5 billion. Google other revenues also includes things like digital content in Google Play and hardware.

Google Cloud is also getting a new leader after Google said last year that Diane Greene was stepping down. Ex-Oracle exec Thomas Kurian will now lead the cloud business. Google CEO Sundar Pichai also disclosed that the company now has 5 million paying customers for G Suite, Google's cloud-based productivity offering that competes with Office 365:

Google Cloud closed out the year strong with momentum across the business. Last year, we more than doubled both the number of Google Cloud platform deals over $1 million as well as the number of multiyear contracts signed. We also ended the year with another milestone, passing 5 million paying customers for our Cloud collaboration and productivity solution, G Suite. Our focus on helping customers digitally transform their businesses is paying off. We continue to see strong growth in all our major geographies and industries this quarter. In financial services, we signed agreements with two of the top financial institutions in the U.S. to help them transition their business to Google Cloud with our highly secure solutions.

That's a notable milestone, but shows how far behind Google is compared to Microsoft: Office 365 is now approaching 200 million paying customers between commercial and consumer segments.

Inside of a Google data center

A Google data center. Image source: Google.

When pressed for more detail around GCP, Porat declined to elaborate beyond saying that GCP is "one of the fastest-growing businesses across Alphabet."

Capital spending will slow this year

Some of Alphabet's capital expenditures for last year were for office facilities, but the company is investing heavily in data centers and other infrastructure that serves as the backbone for GCP. Capital investments for the Other Bets segment have declined significantly, down to $181 million, mostly as the company has stopped rolling out Google Fiber.

Check out the latest Alphabet earnings call transcript.

Porat said that the growth rate for capital expenditures in 2019 should "moderate quite significantly." Alphabet is "very mindful" about how all that spending impacts free cash flow and earnings growth, according to Porat. Free cash flow declined sequentially to $5.9 billion in the fourth quarter, for example, after spending $7.1 billion in capital expenditures.

Google has some catching up to do, and is spending accordingly.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Evan Niu, CFA owns shares of Amazon. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Amazon. The Motley Fool owns shares of Microsoft and ORCL and has the following options: long January 2020 $30 calls on ORCL. The Motley Fool has a disclosure policy.

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