But those figures don’t come close to expressing the full extent of future spending to which Google parent Alphabet, Meta Platforms, Oracle and many others have committed. That is because a huge swath of their coming financial obligations aren’t reflected on their balance sheets.
Nine top tech companies had some $3 trillion of off-balance-sheet commitments mostly related to AI, according to a Wall Street Journal analysis of footnotes in their most recent securities filings. Those obligations are growing faster than traditional “capex,” which totaled about $600 billion over the past year they reported, and were about triple what the companies owe under their outstanding leases and long-term borrowings.
America’s blue-chip tech companies are placing these huge bets based on assumptions about what the demand for AI computing—and availability of AI hardware—will be in several years. Their hope is that they will easily meet all their obligations with future revenue as consumers and businesses adopt AI in every facet of American life.
If those assumptions about technology and demand prove wrong, these deals to clinch future capacity could become a monstrous burden for the tech companies and their investors.
Meta’s gigantic “Hyperion” data-center project in Louisiana, which is the size of about 1,700 football fields, helps explain how big obligations wind up off tech companies’ balance sheets.
Meta initially agreed to lease Hyperion for a four-year term starting in 2029, with options to renew for up to 20 years. It guaranteed that it would make bondholders whole if it doesn’t stay the entire two decades. The company doesn’t think payments under that guarantee are probable, so it hasn’t recorded any liability on its balance sheet.
In accordance with accounting rules, Meta’s Hyperion lease obligations will remain off balance sheet until it starts paying rent. It said its aggregate initial lease commitment is about $12.3 billion. Meta disclosed $347 billion in total obligations for leases that haven’t kicked in yet, including for Hyperion, as of June.
Across the companies the Journal analyzed, promises of payments under these uncommenced leases totaled $1.2 trillion in off-balance–sheet obligations, or about four times more than what was disclosed a year earlier. In addition to Meta, the Journal reviewed commitments for Alphabet, Amazon.com, Microsoft, Oracle, Nvidia, Broadcom, SpaceX and Advanced Micro Devices.
Data centers get stuffed with a lot of hardware, including the Nvidia chips that are used to train and run models and memory chips that store information. To buy all that, companies sign long-term contractual agreements well in advance to lock in production from their suppliers.
Those and other purchase obligations at the companies the Journal examined stand at a whopping $1.9 trillion. Under accounting rules, purchase commitments typically remain off balance sheet until a product or service is delivered. [...]
For the more anxious set on Wall Street, it is a worrying sign that some tech companies that once seemed to have fortress balance sheets have needed to tap the capital markets frequently.
Alphabet and Amazon recently posted results showing negative free cash flow, meaning their capital spending exceeded the cash they brought in from operating their businesses.
And that is before considering the implications of trillions in off-balance–sheet commitments. Whether or not the revenues ever arrive, purchase commitments and signed leases can’t be canceled, for the most part.
If things go wrong, tech companies will be paying an expensive tab for infrastructure that they can’t profitably use. These obligations could also lead increasingly indebted companies to have to borrow even more.
Image: WSJ
