There’s a basic game that corporate accountants play, which is that if you spend a dollar today, you don’t necessarily have to tell your shareholders that you spent a dollar today. If you want, you can tell them that you spent $0.04 a year for each of the next 25 years. This is called depreciation, and it’s a mostly normal, good, fine thing to do.
So, if you build an expensive data center, you didn’t lose the money! You exchanged it for a building, and the building will sit there for a long time, so you spread the cost over the years you expect it to work. But the fun part of depreciation is that it requires you to guess the future. How long will the building last, 15 years, 25 years? Nobody knows.
Which brings us to Microsoft MSFT 0.00%↑, which had a good day a couple weeks ago. The stock went up 15.5%, adding $450 billion of market value in one day (the largest one-day market cap gain for any American company, ever).
Microsoft birthed the entire market capitalization of Costco in a day. Why? Well, for months, everyone has been worried that big tech is spending too much money on AI, buying too many servers and building too many data centers to train chatbots to write polite emails. But then (!!) on the earnings call Microsoft said something like “good news, everyone, we found $15 billion of capital expenditures that we no longer need to do,” and Wall Street cheered and the stock went bananas. Restraint! Finally!
How exactly do you find $15 billion? Microsoft changed a number in a cell on a spreadsheet. Specifically, it extended the estimated useful life of its data centers from 15 years to 25 years, which, okay, fine, a big concrete shell will probably last 25 years. Concrete is famous for this.
But here’s the thing: there are strict rules about how you categorize renting a building:
If you lease a building for the majority of its useful life, accounting rules say you have basically bought it. That is a “finance lease,” and you have to call it capital expenditures.
If you lease a building for a small fraction of its useful life, you’re just renting it. That is an “operating lease,” and you have to call it operating cash flow.
Stretch the useful life to 25 years and a whole bunch of Microsoft’s future data center leases transformed from finance leases into operating leases. No renegotiated payments, no discounts, no landlord got a phone call.
And here's the part I can't get over: the money is still leaving! Microsoft is still paying the landlords and the construction crews. Same cash, same buildings, same everything. It just exits through a door marked "operating" instead of a door marked "capex."
Meanwhile, in case you were tempted to thing they trimmed spending elsewhere, Microsoft signed $130 billion of new data center leases in the quarter, and it has $662 billion of not-yet-commenced leases ready to go. It’s spending more than ever.
Alas, you know, maybe that’s fine? $450 billion of new market value for moving a number between columns? The biggest one day gain in history, for an accounting estimate? I’d just gently note that the money is still, in fact, gone.