Is AI leverage underestimated? Among the $2 trillion capital expenditure, "financing leasing" supports $400 billion!
Morgan Stanley predicts that out of the $2 trillion in AI capital expenditures over the next three years, as much as $400 billion will be realized through financing leases, and tech giants have already secured $388 billion in future leasing commitments. This trend poses a core challenge for investors: due to the accounting treatment differences between financing leases and operating leases, the free cash flow and leverage ratios in companies' financial reports have lost direct comparability
In the AI-driven computing power "arms race," tech giants are funding the future in an increasingly important yet easily overlooked way—leasing.
According to the Wind Trading Desk, a recent report from Morgan Stanley titled "AI: Leasing The Future" indicates that a "financing lease" model, similar to debt financing, is becoming a key force supporting the expansion of AI infrastructure.
The report points out that as hyperscale cloud service providers expand AI infrastructure at an unprecedented pace, they are increasingly adopting financing leases to acquire data center shells. It is estimated that of the $2 trillion total capital investment in the next three years, up to $400 billion (20%) will come from this.
This model allows tech giants to accelerate capacity expansion, manage liquidity, and lock in future options. More notably, the report shows that these companies have disclosed leasing contracts worth up to $388 billion that are "signed but not yet commenced."
This massive off-balance-sheet commitment is essentially a form of "invisible debt" that will gradually convert into right-of-use assets and lease liabilities on the balance sheet over the coming years. This not only locks in future capital expenditures but also provides investors with a window to observe the strategic determination of major companies regarding AI.
For example, the report mentions that Oracle's lease terms can last up to 15 years, while Meta has signed leases for as long as 30 years, reflecting the confidence and strategic differences among companies regarding future demand.
Financing Lease vs. Operating Lease: The Key "Devil's Details" Affecting Financial Reports
The core of the report analyzes the accounting differences between the two leasing models. A financing lease is economically similar to a transaction where debt is used to purchase an asset, and its accounting treatment splits costs into depreciation (included in operating costs) and interest (included in financial expenses), while principal repayments are included in cash flows from financing activities.
In contrast, an operating lease resembles traditional "renting," where the rent is treated as a single operating expense amortized on a straight-line basis in the income statement, and all cash payments are included in cash flows from operating activities.
This accounting treatment difference is crucial. The report emphasizes that management's judgments regarding lease terms, renewal options, and residual value guarantees will directly determine whether a lease is classified as "financing" or "operating." This means that two economically similar investments may show significant differences in debt, leverage, and profitability on financial reports due to different accounting choices made by companies
Investor Warning: The "Trap" of Free Cash Flow and the Challenge of Comparability
For investors, the biggest "trap" in accounting differences lies in the calculation of free cash flow (FCF). The report clearly states that since the principal repayment of finance leases is classified under "cash flows from financing activities," it does not appear in the traditional FCF formula of "operating cash flow minus capital expenditures." This can lead investors to severely underestimate a company's true capital expenditures and reinvestment rate.
Complicating matters further, the FCF disclosure criteria vary among companies:
- Google (GOOGL), Microsoft (MSFT), and Oracle (ORCL) do not include any impact from finance leases in their FCF calculations.
- Amazon (AMZN) includes assets obtained through finance leases in its FCF metrics.
- Meta (META) and Amazon (AMZN) provide FCF metrics that exclude the principal repayments of finance leases.
This diversity in disclosure makes cross-company comparisons extremely difficult. Morgan Stanley suggests that investors must manually adjust free cash flow (FCF) to account for capital expenditures or principal repayments related to finance leases in order to make "apples-to-apples" fair comparisons and accurately assess the true "free" cash available for dividends and buybacks. Ignoring this adjustment could lead to significant misjudgments regarding a company's valuation and cash-generating ability.
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