Facebook Joins the Big League of Internet Capital Spenders

(Bloomberg Gadfly) -- Facebook Inc. has spent less than five years as a public company, yet its market value is already in the global big leagues. It's now also entering the big leagues of spending, a position that bears watching.

The three highest-spending operators of web and cloud computing services -- Google parent company Alphabet Inc., Amazon.com Inc. and Microsoft Corp. -- collectively dole out more than $20 billion in cash each year to buy computer equipment and run the digital data centers that are the engines of the world's internet hangouts. Facebook is joining this capital expenditure superpower team.

The company said on Wednesday that it expects its capital spending to reach $4.5 billion this year, which would be a 78 percent jump from 2015. Executives say that money is going largely to data centers including a few new ones in the U.S. and Ireland, the servers packed inside those data centers, office buildings, and the pipes that ferry bytes among Facebook's global computer networks and to the public internet.

Facebook expects 2017 to be "an aggressive investment year," including on capital expenditures, Chief Financial Officer David Wehner told analysts Wednesday. The forecast for a big jump in spending -- combined with a warning about a meaningful slowdown in the company's blistering revenue growth rate -- drove a 5.7 percent decline

If we assume Facebook's 2016 capex forecast holds, and outlays jump 78 percent again next year, that would take the 2017 tab to about $8 billion. That figure is almost equal to what Microsoft spent on its data centers, computer equipment and the like in its most recent fiscal year, when the software giant had about $85 billion in revenue. By contrast, analysts expect Facebook to generate 2017 revenue of $36.7 billion, according to the average of estimates compiled by Bloomberg.

Facebook executives talk often about the company's expertise in tweaking its computer networks to maximize efficiency. The company designs its own servers, internet network pipes and even its data center buildings to squeeze as much digital work out of them at the lowest possible cost. No detail is overlooked. Facebook even removes logos on servers so air can flow uninterrupted to cool down the powerful computers.

Still, Facebook isn't yet that efficient with its capital spending. Capex through the first nine months of 2016 works out to about 17 percent of revenue in the same period. At Alphabet, capital spending is about 11 percent of gross revenue.

Google in the last year or so has tightened its purse strings, after a new financial chief came in and imposed greater discipline. Facebook is still boosting spending to juice its growth, as the company should be. But the capex tab is one area investors will keep a close eye on. If the pace of revenue growth slows materially, then Facebook might need to take a breather on capital spending, too.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story: Shira Ovide in New York at sovide@bloomberg.net.

To contact the editor responsible for this story: Matthew Brooker at mbrooker1@bloomberg.net.