In the AI-driven computing power "arms race," tech giants are increasingly funding their future through an important yet often overlooked method—leasing.

According to a recent Morgan Stanley report titled *AI: Leasing The Future*, a debt-like financing model called "financing leases" is becoming a critical force supporting AI infrastructure expansion. The report highlights that as hyperscale cloud providers expand AI infrastructure at an unprecedented pace, they are increasingly turning to financing leases to acquire data center shells. It estimates that out of the $2 trillion in total capital investments over the next three years, up to $400 billion (20%) will come from this source.

This model allows tech giants to accelerate capacity expansion, manage liquidity, and secure future options. Notably, disclosed data shows these companies have already signed $388 billion in "committed but not yet commenced" lease contracts.

These massive off-balance-sheet commitments represent future "hidden liabilities," gradually converting into right-of-use assets and lease liabilities on balance sheets over the coming years. This not only locks in future capital expenditures but also provides investors a window into companies' AI strategic commitments. For instance, Oracle's lease terms extend up to 15 years, while Meta has signed 30-year contracts, reflecting varying confidence levels in long-term demand.

**Financing Lease vs. Operating Lease: The Critical "Devil in the Details" Affecting Financials** The report emphasizes the accounting differences between the two lease models. Financing leases, economically similar to debt-financed asset purchases, split costs into depreciation (recorded as operating expenses) and interest (recorded as financial expenses), with principal repayments classified under financing cash flows.

In contrast, operating leases resemble traditional rentals, with straight-line rent expenses recorded as operating costs and all cash flows categorized under operating activities.

These accounting distinctions are crucial. Management decisions on lease terms, renewal options, and residual value guarantees determine whether a lease is classified as "financing" or "operating." This means two economically similar investments could show vastly different debt levels, leverage ratios, and profitability on financial statements due to differing accounting choices.

**Investor Alert: The "Trap" in Free Cash Flow & Comparability Challenges** For investors, the biggest pitfall lies in free cash flow (FCF) calculations. The report notes that since financing lease principal repayments are classified as financing cash flows, they are excluded from the traditional FCF formula (operating cash flow minus capex). This leads to significant underestimation of a company’s true capital reinvestment rate.

Compounding the issue, FCF reporting varies across firms: - **Alphabet (GOOGL), Microsoft (MSFT), and Oracle (ORCL)** exclude financing lease impacts from FCF. - **Amazon (AMZN)** includes assets acquired via financing leases in its FCF metric. - **Meta (META) and Amazon (AMZN)** provide FCF metrics adjusted for financing lease principal repayments.

This inconsistency makes cross-company comparisons challenging. Morgan Stanley advises investors to manually adjust FCF by incorporating financing lease capex or principal repayments for an apples-to-apples assessment of true "free" cash available for dividends and buybacks. Ignoring this adjustment could lead to material misjudgments in valuation and cash-generation capabilities.