Big Tech's AI Bill Is $3 Trillion Bigger Than It Looks

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Sabrina Siddiqui (0:33)

Defense contractor L3Harris has replaced its CEO after an investigation into his conduct. Plus, why Big Tech's AI spending is $3 trillion higher than it seems.

Peter Rudegeair (0:45)

Companies are on the hook for these spending commitments, whether or not it becomes profitable for them to keep up with their AI enterprises.

Sabrina Siddiqui (0:52)

And the Huthy rebels are tightening their grip on one of the most important energy choke points. It's Monday, August 17th. I'm Sabrina Siddiqui for the Wall Street Journal, filling in for Alex Ossola. This is the PM Edition of What's News, the top headlines and business stories that move the world today.

The defense contractor L3Harris Technologies, that's the company behind the $400 million overhaul of the Qatari jet now used as Air Force One, has ousted its chairman and CEO, Christopher Kubasic. L3Harris says that an investigation found that he violated its code of conduct. There weren't more details of the allegations, except that L3Harris says the misconduct didn't affect its financial reporting, customer relationships or operations. The company has named Sam Metha, who ran its space and communication systems units, as the new president and CEO. Its shares fell more than 4% today. The Wall Street Journal is exclusively reporting that investment firm General Atlantic is once again exploring an IPO. The company manages about $130 billion, and it's invested in AI company Anthropic and clothing company Viore. While General Atlantic first filed confidentially for an IPO at the end of 2023, it didn't move ahead. The journal understands that it recently refreshed its paperwork with the SEC, something it has to do before an IPO. The offering could come before the end of the year.

Big tech's AI spending is even bigger than the eye-popping quarterly numbers suggest. A new Wall Street Journal analysis finds nine major tech companies, including Alphabet, Amazon, Meta, and Microsoft, are on the hook for roughly $3 trillion in commitments that don't show up on their balance sheets. That's way more than the traditional capital expenditures over the past year for AI of about $600 billion.

So how do trillions of dollars end up hiding in the footnotes? And what happens if AI demand doesn't live up to the bet these companies are making? Peter Rudegeair, who covers hedge funds and investing at the Wall Street Journal, joins us now to discuss. Peter, let's start with the basics. How are companies like Meta and Alphabet able to commit to trillions of dollars in spending without it showing up on their balance sheets?

Peter Rudegeair (3:13)

So all of the spending that they're committed to is happening in the future.

And under the accounting rules, you only have to bring it on balance sheet and in your financial statements when you've actually spent the money and the service has been delivered. So we looked at two major categories of off balance sheet obligations. Purchase commitments, think of things like chips for data centers and all the other equipment. And then also leases for some of those data centers that somebody else is operating. Once that lease starts, it gets brought onto their balance sheet, but until then, it can stay off.

Sabrina Siddiqui (3:43)

Meta's Hyperion data center in Louisiana seems like a great example here. What does that project tell us about how these off-balance sheet deals actually work in practice?

Peter Rudegeair (3:52)

Meta is the builder of the Hyperion project in Louisiana, but you won't find Hyperion or the $27 billion in debt that was raised to build it anywhere in Meta's balance sheet. It is being built and is owned by a joint venture between Meta and an investment firm called Blue Owl Capital, a holding company that owned their stake actually raised the $27 billion in a bond sale. So that's the landlord, that's the debts on their balance sheet. Meta initially signed a four-year lease for the Hyperion data center.

It is on the hook for 20 years of lease payments, so it provided a guarantee that it will pay those entire 20 years of lease payments, whether or not it occupies the facility. But it doesn't think that it is probable that it will be on the hook for, you know, forcing that guarantee. So right now, it is not recorded as a liability on its balance sheet.

Sabrina Siddiqui (4:39)

So these companies are essentially betting that AI demand will keep climbing fast enough to justify all the spending. But what happens if that bet doesn't pay off?