From MSFT:
1. “at the start of FY '27, we are extending the estimated useful life of our data centers and office buildings from 15 to 25 years, reflecting our operating history and expected use of these assets.
Simple words: by extending the “useful life” depreciation charges go down, boosting operating profit and margin.
2. “The greater impact is on capital expenditures as more of our future data center leases will shift from finance leases to operating leases as a result of this update. Finance leases are included in capital expenditures while operating leases are not.
Simple words: Finance leases are counted in Capex. Free Cash Flow is Operating Cash Flow minus Capex. MSFT has changed its lease classification from Finance Lease to Operating Lease. So the fat spends on Data Centers will not be counted in Capex going forward. This will artificially boost Free Cash Flow.
(1) is designed to boost a P&L item. Investors who patch a multiple on P&L are now happy because profits are “higher”.
(2) is designed to boost Free Cash Flow. Those that patch on a simple multiple to FCF are also now happy due to “higher” FCF!
Net-net: MSFT stock is up 15%.
When it should actually….! 🙂