Alphabet’s Fine Print Reveals Hidden Cost of the AI Talent War

Alphabet’s plan to sell $80 billion worth of shares, billed as a way to pay for AI infrastructure and compute, is surprising enough, given the capital raise’s size and the fact that the company last raised equity 21 years ago, when Gwen Stefani’s “Hollaback Girl” was the song of the summer. But there’s another eye-catching detail in the offering’s fine print that reflects an underappreciated reality of big tech’s AI arms race. 

Nearly 40% of the Google parent's proceeds aren’t going to data centers at all, but to cover tax obligations tied to employee equity awards, the company said on Monday. That big IRS tab shows how top tech talent still represents significant cash costs to the company, even though employees often get large chunks of their pay in stock. 

The taxes Alphabet is talking about are technically taxes its workers owe. But many companies handle those payments by withholding a portion of the shares employees receive when their stock vests. The company then sends the equivalent amount of cash to the IRS. 

There are some benefits to doing things that way. Employees don’t have to deal with selling their shares in the open market to get cash, while companies can also keep share counts lower, which investors generally like. But that approach creates a tricky cash dynamic when tech companies are spending heavily on other things like AI while their share prices also rise. 

A higher share price means a bigger tax bill for the company as employee shares vest, so even more cash goes out the door during a frenzied investment cycle. That’s what looks to be happening with Alphabet, whose stock is around all-time highs and up significantly this year. 

The numbers can move fast. The $30 billion Alphabet expects to need this year for taxes related to stock compensation, for instance, is roughly double last year’s total. It also would represent 14% of the operating cash flow analysts expect it to generate this year, according to FactSet. That would be a big jump from about 9% last year, my analysis of securities filings shows. (This figure comes from the “tax withholding related to vesting of restricted stock units” line in Alphabet‘s statement of stockholders’ equity.)

It’s not just Alphabet. The tax bills across five companies at the center of the AI boom—Nvidia, Meta, Microsoft, Alphabet and Amazon—reached nearly $60 billion last year, securities filings and estimates show. Upcoming initial public offerings for SpaceX, Anthropic and OpenAI will also trigger big tax hits from years of accumulated unvested equity at sky-high valuations. That’s another big cash need on top of expensive AI infrastructure. 

A reduction in tax bills for employees may be a side effect of the bloodletting this year down the street in Menlo Park, Calif., at Meta Platforms. Last year Meta withheld more than $18 billion to cover the vesting of employee equity awards—more than Alphabet, despite having fewer than half the number of employees. That represented about 16% of Meta’s operating cash flow overall. After the company moved to lay off 8,000 people this year, about 10% of its workforce, those employees won’t vest the rest of their shares, reducing Meta’s tax obligations. Its stock is down over the past year but has nearly quintupled since its end-of-2022 trough. 

Alphabet’s tax obligations, of course, pale in comparison to the $186 billion analysts expect the company to spend on capital expenditures this year. But Wall Street constantly picks apart that capex figure. It’s well understood and well modeled as part of the free cash flow metric everyone tracks, and management can control it. The employee equity tax obligations instead sit on the cash flow statement as a financing activity, alongside companies’ share repurchases, which aren’t factored into free cash flow. 

For big tech companies, particularly Alphabet and Meta, these tax obligations have been swelling meaningfully as their stock prices rise. These companies saw big increases in these obligations the last time their stocks rose quickly, in 2021, as interest rates were zero. But their capital expenditures were much smaller back then, keeping the combination of tax withholding and capital expenditures as a percentage of operating cash flow well below 50%. That number stands at 64% of cash flow for Alphabet last year and 75% of cash flow for Meta.

The payments mean windfalls not just for energy providers, chipmakers and neoclouds, but for the IRS as well.

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