Has AI leverage been underestimated? Out of $2 trillion in capital expenditures, "financing leases" accounted for $400 billion!

Has AI leverage been underestimated? Out of $2 trillion in capital expenditures, "financing leases" accounted for $400 billion!

In the AI-driven computational “arms race,” tech giants are funding the future through a method that is increasingly important yet often overlooked—leasing.

According to WindChaser Trading Desk, a recent report released by Morgan Stanley titled “AI: Leasing The Future” shows that a “financing lease” model, similar to debt financing, is becoming a key force supporting the expansion of AI infrastructure.

The report notes that as hyperscalers expand their AI infrastructure at unprecedented speed, they are increasingly using financing leases to acquire data center shells. It is estimated that out of the $2 trillion in total capital investment over the next three years, as much as $400 billion (20%) will come from this source.

This model allows tech giants to accelerate capacity expansion, manage liquidity, and lock in future options. What’s more noteworthy is that the report shows that these companies have disclosed “signed but not yet commenced” lease contracts valued at up to $388 billion.

This enormous off-balance-sheet commitment is essentially “hidden liabilities” of the future, which will gradually be converted 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 gives investors a window to observe each company's AI strategic determination.

For example, the report mentions Oracle’s lease term is up to 15 years, while Meta has signed lease contracts as long as 30 years, reflecting companies’ confidence in future demand and strategic differences.

Financing Lease vs. Operating Lease: The Crucial “Devil in the Details” of Financial Reports

The core of the report analyzes the accounting differences between the two lease models. Financing leases are economically similar to transactions in which assets are purchased with debt; their accounting splits the cost into depreciation (included in operating costs) and interest (included in financial expenses), while principal repayment is included in financing cash flows.

In comparison, operating leases are more like traditional “rentals,” where rent is recognized as a single operating expense amortized on a straight-line basis in the income statement, with all cash payments moved into operating cash flow.

This difference in accounting treatment is crucial. The report emphasizes that management judgment on lease term, renewal options, and residual value guarantees directly determines whether a lease is classified as “financing” or “operating.” That means two economically similar investments could, due to different accounting choices by different companies, lead to significant differences on financial reports in terms of debt, leverage, and profitability.

Investor Warning: The “Trap” of Free Cash Flow and Challenges with Comparability

For investors, the biggest “trap” from this accounting difference lies in the calculation of Free Cash Flow (FCF). The report points out that because principal repayments of financing leases are classified as “financing cash flows,” they do not show up in the traditional FCF formula (“operating cash flow minus capital expenditures”). This can cause investors to severely underestimate a company’s actual capital investments and reinvestment rate.

What's more complex is, companies’ FCF disclosure standards are not unified:

  • Google (GOOGL), Microsoft (MSFT), and Oracle (ORCL) do not include any impact of financing leases in their FCF calculations.
  • Amazon (AMZN) includes assets obtained through financing leases in its FCF metrics.
  • Meta (META) and Amazon (AMZN) provide FCF metrics that deduct principal repayment of financing leases.

This diversity in disclosure makes cross-company comparison extremely difficult. Morgan Stanley suggests that in order to conduct “apples-to-apples” fair comparisons and accurately assess the truly “free” cash available for dividends and buybacks, investors must manually adjust FCF to include capital investment or principal repayment from financing leases. Ignoring this adjustment can cause major deviations in company valuation and judgments of cash generation capacity.

 

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The above content comes from WindChaser Trading Desk.

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