Cloud Giants and AI: Wall Street’s Worry Over Revenue Round-Trips

Wall Street has its eyes firmly trained on big tech’s cloud revenue numbers, and there’s a rising tide of concern about whether these figures are being artificially inflated by massive investments in AI startups and related projects. The term of the hour is “revenue round tripping,” a phrase that rolls off the tongue about as smoothly as a rusty bicycle chain yet encapsulates a significant potential issue in the tech sector.

To break it down, revenue round tripping occurs when a large tech company invests in an AI startup, which then, perhaps predictably, channels a portion of that investment right back into the tech giant’s own cloud and AI services. It’s akin to shifting money from one pocket to another and then bragging about how heavy your pockets are. For instance, Amazon Web Services (AWS) invested a whopping $4 billion in Anthropic, an AI startup, and—surprise, surprise—Anthropic agreed to use AWS as its primary cloud provider. Google and Microsoft have engaged in similar practices, with Microsoft investing in OpenAI and Oracle doing the same with Cohere.

Business Insider was the first to raise the alarm on these practices last year, as several high-profile investors began to worry that these deals could artificially inflate cloud revenue numbers. Analysts are questioning whether AWS revenue includes the cost of training Anthropic models or if Oracle Cloud Infrastructure (OCI) accounts for Cohere model training. This ambiguity could muddle comparisons between cloud vendors and cast doubts on the narrative of a broad-based recovery in cloud workloads.

In recent years, the growth in cloud spending has slowed as companies tighten their belts amid a sluggish economy and high inflation. If the recent uptick in cloud revenue is partly due to round-tripping deals, then the recovery isn’t as robust as it might initially appear. Microsoft, however, may be an exception to this trend. According to RBC, the company disclosed that it does not recognize any revenue from OpenAI training its GPT models on Azure’s cloud infrastructure. This transparency could set Microsoft apart from its competitors in the eyes of wary investors.

An Amazon spokesperson declined to clarify whether AWS’s revenue numbers include cloud spending by Anthropic, leaving the door open for more speculation. The lack of transparency in these dealings has only served to heighten concerns among analysts and investors. While these investments in AI startups represent a strategic move to bolster innovation and growth, they also pose the risk of muddying the financial waters.

As the dust settles, one thing is clear: the practice of revenue round tripping has put a spotlight on the need for greater transparency in how cloud revenue is reported. Investors and analysts are right to scrutinize these numbers closely. It’s not just about ensuring fair competition among cloud providers, but also about safeguarding the integrity of financial reporting in an industry that plays a pivotal role in the global economy.