Where Did the Costs Go?
2026-11-06 · @Mythogen Engine
AI in the Financial Statements, Part 3
The accounts first, then the news
The big four cloud companies' AI costs have not disappeared; they have moved. Microsoft moved them into leases and future depreciation, Alphabet and Meta started borrowing and buying back less stock, and Amazon's free cash flow in 2025 was down to just US$7.7 billion. All of this is in the 2025 annual reports, before this year's third quarter.
At the end of October the four companies reported third-quarter results. Alphabet fell 12.6% in a day, with quarterly free cash flow of negative US$9.07 billion; the market compared who was burning the most (FinGuider summary). This article asks a different question: where did the costs go?
On 5 November, worry turned into selling: the Nasdaq fell 5.52% in a day on fears that the AI build-out would slow (CNN). This article is not about that day, only about what was already written in the accounts before it.
All figures here come from the annual reports each company filed with the US Securities and Exchange Commission (SEC): annual only, no quarters. Microsoft's latest is fiscal 2026 (July 2025 to June 2026); the other three are calendar 2025. So this is the prequel: the structure was in place before the shift happened.
Microsoft: operating cash flow up 50%, free cash flow down
Microsoft's operating cash flow in fiscal 2026 was US$182.9 billion, 50% more than the US$118.5 billion of fiscal 2024. Over the same period, cash capital spending rose from US$44.5 billion to US$115.9 billion, and free cash flow (operating cash flow minus cash capital spending) fell from US$74.1 billion to US$67.0 billion.
Capital spending divided by depreciation was 3.38, the highest since data begins in fiscal 2008. A ratio above 1 means more equipment was put in that year than was depreciated. The US$115.9 billion invested today will turn into depreciation year by year over the coming years, weighing on profit.
Microsoft's operating cash flow rose 50% in two years; free cash flow peaked in fiscal 2024 and fell back (US$ billions, fiscal years ending 30 June; free cash flow = operating cash flow − cash capital spending)
| Fiscal year | Operating cash flow | Cash capital spending | Free cash flow |
|---|---|---|---|
| 2017 | 39.5 | 8.1 | 31.4 |
| 2018 | 43.9 | 11.6 | 32.3 |
| 2019 | 52.2 | 13.9 | 38.3 |
| 2020 | 60.7 | 15.4 | 45.2 |
| 2021 | 76.7 | 20.6 | 56.1 |
| 2022 | 89.0 | 23.9 | 65.1 |
| 2023 | 87.6 | 28.1 | 59.5 |
| 2024 | 118.5 | 44.5 | 74.1 |
| 2025 | 136.2 | 64.6 | 71.6 |
| 2026 | 182.9 | 115.9 | 67.0 |
Source: fintech-data us/tickers/MSFT.csv, SEC companyfacts, latest filed values.
Debt moved from bonds to leases
Microsoft's long-term debt fell from US$77.1 billion in fiscal 2017 to US$40.3 billion in fiscal 2026, which looks like deleveraging. Over the same period, finance lease liabilities rose from US$2.5 billion to US$66.6 billion, and since fiscal 2025 (US$46.2 billion) they have been larger than its bonds (US$43.2 billion).
Microsoft's finance lease liabilities have exceeded its long-term debt since fiscal 2025 (US$ billions, fiscal year-end balances; long-term debt includes the current portion)
| Fiscal year | Long-term debt | Finance lease liabilities |
|---|---|---|
| 2017 | 77.1 | 2.5 |
| 2018 | 76.2 | 4.3 |
| 2019 | 72.2 | 6.6 |
| 2020 | 63.3 | 9.5 |
| 2021 | 58.1 | 12.5 |
| 2022 | 49.8 | 14.9 |
| 2023 | 47.2 | 17.1 |
| 2024 | 44.9 | 27.1 |
| 2025 | 43.2 | 46.2 |
| 2026 | 40.3 | 66.6 |
Source: fintech-data us/tickers/MSFT.csv, SEC companyfacts, LongTermDebt and FinanceLeaseLiability.
A finance lease means renting data centres or equipment that someone else has built, for a term covering most of the asset's life; in accounting terms it is the same as borrowing to buy the asset. When the lease starts, the asset and the liability are booked together, with no cash going out at that moment; principal and interest are paid over the following years. So this investment does not appear in the "purchases of property, plant and equipment" line of the cash flow statement.
In fiscal 2026, Microsoft acquired US$24.6 billion of assets through finance leases, equal to 20% of its cash capital spending. For the other three, the same item was only US$0.6 billion to US$2.9 billion. Looking only at cash capital spending understates Microsoft's real investment.
Counting leases, more goes to shareholders than free cash flow covers
Fiscal 2026 is the first time this has happened at Microsoft: if assets acquired through leases are also deducted as investment, what is left is not enough to pay for buybacks and dividends.
| Fiscal year | Cash free cash flow | After deducting lease-acquired assets | Buybacks + dividends |
|---|---|---|---|
| 2026 | 67.0 | 42.4 | 48.7 |
| 2025 | 71.6 | 51.1 | 42.5 |
| 2024 | 74.1 | 62.5 | 39.1 |
Units: US$ billions.
This is an economic adjustment, not a number on the cash flow statement: no cash is paid when lease assets are acquired, and the actual payments are spread over many years. What it shows is that part of Microsoft's ability to keep paying dividends and buying back stock comes from pushing the payment for its investment further out.
Depreciation fell twice for no visible reason
Capital spending rose every year, yet Microsoft's depreciation fell in two fiscal years: from US$10.7 billion to US$9.3 billion in fiscal 2021, and from US$12.6 billion to US$11.0 billion in fiscal 2023.
In those two years Microsoft extended the estimated useful lives of servers and network equipment. From fiscal 2021, servers went from 3 years to 4 and network equipment from 2 years to 4, raising operating income that year by US$2.7 billion (Microsoft FY2021 annual report); from fiscal 2023, both were extended again to 6 years, raising operating income by US$3.7 billion (Microsoft FY2023 annual report). A longer life means less depreciation each year for the same equipment, and profit rises with it. This is completely legal: it is exactly the kind of accounting estimate described in Part 2 of this series, "Change One Estimate, Earn Billions More".
Estimates cannot be extended forever. Microsoft's depreciation reached US$34.3 billion in fiscal 2026, 55% more than the year before; with a ratio of 3.38, depreciation can only keep rising over the next few years. The next time depreciation slows for no visible reason, it is time to read the notes.
The other three: already borrowing in 2025
In 2025, Alphabet's and Meta's long-term debt both more than doubled while buybacks fell; Amazon's free cash flow dropped from US$32.9 billion to US$7.7 billion.
| Company | Year | Operating cash flow | Cash capital spending | Free cash flow | Buybacks | Long-term debt |
|---|---|---|---|---|---|---|
| Microsoft | FY2026 | 182.9 | 115.9 | 67.0 (71.6) | 22.3 (18.4) | 40.3 (43.2) |
| Alphabet | 2025 | 164.7 | 91.4 | 73.3 (72.8) | 45.7 (62.2) | 49.1 (12.0) |
| Meta | 2025 | 115.8 | 69.7 | 46.1 (54.1) | 26.2 (30.1) | 58.7 (28.8) |
| Amazon | 2025 | 139.5 | 131.8 | 7.7 (32.9) | Not reported | 68.8 (58.0) |
Units: US$ billions; prior year in brackets. Microsoft's prior year is fiscal 2025.
Amazon's free cash flow was already negative in 2021 and 2022 (negative US$14.7 billion and negative US$16.9 billion), so going negative is not new. It pays no dividend, and its 2025 annual report has no buyback line, so the table leaves it blank rather than writing 0.
Alphabet's and Meta's free cash flow is still positive, but the change is already on the balance sheet: before running short of money, borrow first and buy back less stock first. The third-quarter news is a continuation of that direction.
The third-quarter reports at the end of October pushed further in the same direction. Amazon's free cash flow turned to negative US$42.4 billion (CNBC); Meta's free cash flow for the quarter was negative US$2.1 billion (Vantage). None of the four cut spending for lack of money: Microsoft trimmed its full-year forecast from US$175 billion to US$170 billion, citing delivery delays at chip suppliers; Alphabet said capital spending in 2027 would "significantly increase" (CNBC).
The quarterly reports contain three more things that show where the money comes from more clearly than the headlines:
- Alphabet went from buying back shares to selling new ones. It bought back no shares at all in the first three quarters of 2026 (Q1 report, Q2 report, Q3 report), against US$45.7 billion of buybacks for all of 2025. In June it announced a US$40 billion at-the-market share offering; in the third quarter it also issued US$28.7 billion of bonds, and its diluted share count rose about 1.4% (24/7 Wall St.).
- Meta's long-term debt rose 40% in nine months. From US$58.7 billion at the end of 2025 to US$80.9 billion at the end of September 2026 (FourWeekMBA, from the quarterly reports).
- Microsoft's leases are now twice its bonds. At the end of September 2026, finance lease liabilities were US$71.0 billion (Microsoft quarterly report), against total debt of only US$35.5 billion; leases signed but not yet commenced reached US$364.6 billion, up from US$329.1 billion three months earlier (FourWeekMBA, from the quarterly reports). As these leases start, they will enter the balance sheet one by one.
All three are written in the quarterly reports and were public by the end of October. After 5 November, most news explained that day's fall in political terms; the change in the accounts began well before.
The money flows to Taiwan
Part of the four companies' capital spending lands in the expansion of Taiwan's supply chain. On a trailing-four-quarter basis to Q2 2026, copper-clad laminate (Elite Material) and printed circuit boards (Gold Circuit Electronics) for AI servers expanded fastest, packaging and test next, with TSMC at 2.19.
AI server materials and packaging and test expanded fastest; memory is still below 1 on a four-quarter basis (capital spending ÷ depreciation, Q2 2026)
| Company | Segment | Trailing four quarters | Q2 2026 single quarter |
|---|---|---|---|
| Elite Material (2383) | AI server materials | 7.24 | 8.13 |
| Gold Circuit Electronics (2368) | AI server materials | 5.24 | 4.04 |
| KYEC (2449) | Packaging and test | 3.22 | 2.59 |
| ASE Technology Holding (3711) | Packaging and test | 3.03 | 4.28 |
| TSMC (2330) | Foundry | 2.19 | 2.53 |
| Powertech Technology (6239) | Packaging and test | 2.15 | 1.38 |
| Unimicron (3037) | AI server materials | 1.24 | 1.24 |
| Winbond (2344) | Memory | 0.97 | 1.73 |
| Nanya Technology (2408) | Memory | 0.90 | 1.40 |
| PSMC (6770) | Foundry | 0.59 | 0.69 |
| Macronix (2337) | Memory | 0.23 | 0.38 |
Source: fintech-data tw/companies/*.csv, MOPS consolidated statements, Q2 2026, exported 29 October 2026.
The three memory makers are still below 1 over four quarters, but Winbond's and Nanya's Q2 single quarters have risen to 1.73 and 1.40, meaning quarterly investment already exceeds depreciation. At its 12 October earnings call, Nanya disclosed capital spending of about NT$27.6 billion for the first three quarters (Pocket); subtracting the NT$6.8 billion in its first-half filings, Q3 alone was about NT$20.8 billion, five times Q2. At its 3 November earnings call, Winbond said it had spent NT$23.4 billion in the first three quarters (TechNews), putting Q3 alone at about NT$15.3 billion, three times Q2. For both, the figures need to be checked against the cash flow statements in the Q3 2026 filings (all published by 16 November).
Two limits. First, this shows only expansion, not which customer the orders come from, so it cannot be equated directly with the big four's money. Second, Taiwanese depreciation includes depreciation of right-of-use assets, while US net depreciation excludes operating leases, so the ratios in the two markets should not be compared directly.
What this data cannot see
- Annual only. The US data have no quarterly figures; this year's third-quarter shift will only enter the annual data with the annual reports in early 2027.
- Data as of 8 October 2026. The SEC data were pulled on that day; filings made afterwards are not included.
- Leases not yet commenced are off the books. Leases signed but not yet started appear only in the text of the notes, with no standard account. Microsoft's figure at the end of September 2026 was US$364.6 billion (see above); the annual data cannot see it at all.
- Amazon uses a different capital spending account. It uses "payments to acquire productive assets" (PaymentsToAcquireProductiveAssets), slightly broader than the other three's "purchases of property, plant and equipment".
- Causation not proven. The expansion of Taiwan's supply chain and the big four's spending happen at the same time, but the data themselves do not show order relationships.
- Not back-tested. This article describes structure; it does not give buy or sell signals.
Receipts
Each of the three predictions below has a check date. When the results are out, I will check them with the same data and definitions, and if I am wrong I will say so.
| # | Prediction | Check date |
|---|---|---|
| 1 | At least one of the four says at its January–February 2027 earnings call that 2027 capital spending will be lower than 2026 | February 2027 |
| 2 | Meta's free cash flow for 2026 (operating cash flow minus cash capital spending) is negative | February 2027 |
| 3 | Microsoft's fiscal 2027 free cash flow after deducting lease-acquired assets is again below buybacks plus dividends | July 2027 |
All three could fail. Number 1 runs against what the companies themselves say: all four have said they will spend more next year; if it comes true, November's worry will have become fact. Number 2 so far rests on only one quarter of evidence, the third.
Method and sources
Every number can be checked yourself, or you can hand the CSV links below to your own AI to recalculate.
- US (SEC companyfacts, annual, latest filed values): MSFT, GOOGL, META, AMZN
- Taiwan (MOPS, consolidated statements): one file per company, for example 2330, 2408
- Definitions and known limits: data.txt; lookup page: lookup.html
Definitions: free cash flow = operating cash flow (NetCashProvidedByUsedInOperatingActivities) − cash capital spending; depreciation is net depreciation (Depreciation), excluding amortisation; Microsoft's fiscal year ends on 30 June, the other three on 31 December. Taiwan ratios are trailing four-quarter totals.
AI disclosure: the data platform was designed by the author; the code was written with AI assistance, with every change reviewed by a person; account mapping was decided by a person. The first draft of this article was written by AI from the author's analysis and platform data, then reviewed and revised by the author.
This article is not investment advice.
AI in the Financial Statements
- One Industry Code, Two Opposite Moves
- Change One Estimate, Earn Billions More
- Where Did the Costs Go? (this article)
- The Payer Starts Collecting
- Margins Still at Record Highs, and the First Turning Signal Has Appeared
@Mythogen Engine