Why Google continues to invest heavily on capital expenditures

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Google is far more aggressive on capital expenditures than competitors

Google (GOOGL) recently announced its 2Q14. It mentioned that it spent $2.6 billion on capital expenditures during the quarter. This amount was ~64% higher than the capital expenditure spent in the same quarter last year. This increase seems high because Google’s competitors are far more conservative on capital expenditure (or Capex) spending. As the following chart shows, only Amazon’s (AMZN) spending growth on Capex was comparable to Google. The rest of the players like Yahoo (YHOO), Facebook (FB), and Microsoft (MSFT) spent less aggressively than Google. Then why is Google being so aggressive? Let’s find out below.

Capex Spending

Google continues to make investments in key strategic areas

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During the conference call to announce earnings, Google’s management mentioned, “This quarter, the majority of the Capex spend was related to data center construction, real estate purchases, and finally production equipment in that order. Investors should see our investment in Capex as a positive signal, since it reflects our sustained optimism about Google’s business.” The company also mentioned that long-term it will continue to invest in key strategic areas such as infrastructure and real estate.

Investments in the cloud services market driving Capex spending

During the conference call, Google mentioned that the growth in cloud services has been instrumental to its Capex spending growth. According to a report from the International Data Corporation (or IDC), the cloud services market is expected to grow from $47.4 billion in 2013 to $107.2 billion in 2017, at a compound annual growth rate of 23.5%. Through this investment, Google is clearly looking to access the fast growth expected in the cloud services market.

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