Wall Street’s AI Jitters: Cloud Giants’ Revenue Rollercoaster
Staff Editor
3 min read
Wall Street is catching a case of the jitters over big tech’s cloud revenue numbers. The culprit? A sneaky practice known as “revenue round-tripping,” an arrangement where big tech companies invest heavily in AI startups, which then turn around and spend that money on the tech giants’ cloud services. It’s a bit like lending your friend $20 and having them immediately spend it on your lemonade stand. Sounds like a win-win, right? But investors aren’t so sure.
Take, for example, Amazon Web Services (AWS). They recently shelled out a staggering $4 billion to Anthropic, an AI startup, with the understanding that Anthropic would make AWS its primary cloud provider. Not to be left out, Google and Microsoft made similar moves. Google cozied up to some AI startups, and Microsoft doubled down on its relationship with OpenAI. Oracle wasn’t going to let its competitors have all the fun and struck a deal with Cohere, making Oracle its cloud partner shortly after an investment.
This “I scratch your back, you scratch mine” scenario has drawn the ire of analysts and investors. Business Insider was one of the first to sound the alarm last year. High-profile investors began to worry that these cozy deals might be artificially inflating cloud revenue numbers. The concern is that this revenue round-tripping could create a mirage of robust growth when in reality, the financial landscape might be a bit more barren.
RBC’s Jaluria expressed concerns about how these round-tripping deals might affect transparency and comparability among cloud vendors. If AWS includes revenue from Anthropic’s training models, or Oracle’s OCI counts revenue from Cohere, then how can investors accurately gauge who’s genuinely thriving? This uncertainty casts a shadow over the narrative of a broad-based recovery in cloud workloads. Investors are eager for clarity, but answers are hard to come by. An Amazon spokesperson, for instance, declined to confirm whether AWS’s revenue numbers include cloud spending by Anthropic.
Adding another layer to this convoluted cake, cloud spending growth has already been slowing as customers look to tighten their belts amidst a tepid economy and high inflation. If a chunk of this apparent recovery is merely the result of round-tripping deals, the outlook isn’t as sunny as it seems. It’s like finding out that the “freshly squeezed” lemonade at your stand is just powdered mix.
Interestingly, Microsoft might be an outlier in this cloudy conundrum. RBC notes that Microsoft recently disclosed it doesn’t recognize any revenue from OpenAI training its GPT models on Azure’s cloud infrastructure. This revelation could mean Microsoft is steering clear of the round-tripping tactic, potentially giving it a more transparent revenue stream compared to its peers.
As the debate continues, it’s clear that Wall Street will keep dissecting these numbers with a fine-tooth comb. Investors want to ensure that what they see is genuine growth and not just a clever financial sleight of hand. After all, they didn’t sign up for a magic show; they signed up for solid, dependable returns.
