​How Big Tech’s Financials Obscure the True Cost of the AI Buildout

**SPEAKER_1** (0:00)
As companies move beyond experimenting with AI and testing proofs of concept, they often struggle with how to effectively scale it. At the break, join Nigel Vaz, CEO of enterprise AI technology company Publicis Sapient, who explains how companies can overcome the common execution challenges of AI to create meaningful business value.

**Telis Demos** (0:21)
Hi, I'm Telis Demos. Today's show, we're gonna be talking all about the NICs. We're gonna go over every best... No, I'm kidding. Actually, today's show is about AI hyperscalers and free cash flow. But don't worry, it will be just as exciting as all the NBA playoff games were.
First, I want to introduce Kevin Koharki. Kevin, say hi.

**Kevin Koharki** (0:42)
How are you doing, guys? It's a pleasure to be here. Thanks for having me.

**Telis Demos** (0:44)
Kevin is a longtime financial analyst and a principal at CAE Consulting. He's also a professor at Purdue University. And over here, we've got the WSJ's own Jonathan Weil. John, say hi.

**Jonathan Weil** (0:55)
Hi, Telis. Hi, Kevin.

**Telis Demos** (0:58)
John works with me at Heard on the Street. And for those of you who aren't already familiar with John's work, he is basically the goat of accounting-driven reporting. And he's been doing it since the days of Venron and Worldcom.
All right. So why have I got these guys here today? I know that a lot of you out there in the audience are very worried about whether or not we're in some sort of AI-driven bubble. And I know that that worry has become especially acute after SpaceX's IPO. And it's blast off now as of when we're recording toward a $3 trillion valuation. So as we get into the start of earnings season, we wanted to provide everybody with some ways to think about whether or not the results of these companies are in any way matching or keeping up with the hype that we are seeing in the pricing and just conversation around them. And that's companies like Nvidia, Microsoft, Alphabet, Meta.
And along those lines, I think it's something that Jon Weil has been writing about, has been a really good guide to how to think about some of that. And I know, Jon, that some of that story started with a conversation with Kevin. So why don't you take us behind the scenes of how you guys first came into contact? What conversation did you start having coming out of that?

**Jonathan Weil** (2:10)
I think it was February, and you just cold called me or emailed me pretty much out of the blue and said, I've got a story for you about companies that are completely overstating their earnings, aren't profitable, even barely profitable, and it's all because they understate the cost of stock-based compensation and I want to show you how. That's where it got really interesting because then you can look at, Meta was the example that I used for the column in February.
You can see that while they start off with X amount of net income and it looks really impressive, and then you look at all their capital, you look at their cash flow, it's called a standard number, called cash flow from operating activities, it still looks impressive. Then you look at how much their capital investments are, CAPEX it's often called. Then you say, it looks less impressive, they're spending a lot of money on data centers. Then you have to take into account the cash costs of stock-based compensation which basically consists of paying taxes, withholding taxes for employees, and then buybacks that are related to the actual stock-based payments themselves because you're trying to offset dilution to keep shareholders from having their stakes diluted. You take those two elements and now you're down to almost no earnings, almost no free cash flow.
The free cash flow, again, it's what is left over to either pay down debt or send cash back to your shareholders once all of your capital investment and all your compensation activities are done with. And Meta removed like for 2025, it removed like 96 percent of their free cash flow or cash flow from operating activities.

**Kevin Koharki** (3:44)
I always put it in cash from operating activities because to me it's compensation. So whether I'm paying you and John in cash or I'm paying you in stock-based comp makes no difference.
If at the end of the day I'm going to buy back the stock and pay cash, then that to me is an operating activity. So the adjustment I make is I actually reduce operating cash flow. And then to John's point, take out capital expenditures. And what you really left is what the owner would walk away with, which is the adjusted free cash flow that I think John and I like to call it.