Wall Street’s Jitters: Cloud Giants’ AI Deals Spark Revenue Round-Trip Concerns

Wall Street is starting to break a sweat over big tech’s cloud revenue numbers. The jitters aren’t about the dollars rolling in but rather where those dollars are coming from. Analysts and investors are raising eyebrows at a practice known as “revenue round tripping.” It sounds like a snazzy dance move, but in reality, it’s a financial maneuver that might be boosting cloud revenue figures in ways that aren’t entirely transparent. Picture this: a big tech company invests in an AI startup, and, like clockwork, the startup spends a chunk of that investment on cloud and AI services from the very same company. The money makes a round trip, and voila, cloud revenue gets an artificial boost.

Take Amazon Web Services (AWS) for instance. When AWS invested a whopping $4 billion in Anthropic, a promising AI startup, Anthropic agreed to make AWS its “primary cloud provider.” This isn’t an isolated incident. Google and Microsoft have done similar two-step arrangements. Google funneled funds into an AI startup, which then turned around and became a cloud client. Microsoft invested in OpenAI with a similar understanding. Even Oracle jumped on the bandwagon, becoming Cohere’s cloud partner shortly after investing in the startup. While these deals might look like business as usual, they are causing some high-profile investors to worry about the potential inflation of cloud revenue numbers.

One of the first to raise this alarm was Business Insider. Their report highlighted the concerns of investors about how these deals might be painting an overly rosy picture of cloud growth. Analysts like Jaluria voiced their unease about whether AWS’s revenue included training Anthropic models or if Oracle Cloud Infrastructure (OCI) counted revenue from training Cohere models. The crux of the worry is that these practices could mess with the comparability between cloud vendors, skewing the narrative around a broad-based recovery in cloud workloads. In an economy where cloud spending growth has slowed due to customers tightening their belts, it’s crucial to know whether the recovery is genuine or a well-executed financial illusion.

Interestingly, Microsoft’s case may be an exception. RBC recently noted that Microsoft doesn’t count any revenue from OpenAI training its GPT models on Azure’s cloud infrastructure. This level of transparency is rare and could set Microsoft apart from its peers. On the flip side, an Amazon spokesperson remained tight-lipped about whether AWS’s revenue numbers include cloud spending by Anthropic, leaving much to the imagination—and concern—of analysts.

The underlying issue is clear: if revenue round-tripping is contributing to the perceived growth in cloud services, then the industry might not be as robust as it seems. Investors and analysts are right to question the sustainability of this growth and the reality behind the numbers. Transparency in financial reporting is essential to maintain trust, and as it stands, big tech’s cloud revenue needs a bit more sunlight to dispel the shadows of doubt.

So, as Wall Street scrutinizes these cloud numbers with a magnifying glass, it’s evident that the industry could use a bit of clarity. Whether this scrutiny will force big tech to adopt more transparent practices or merely lead to more creative accounting tactics remains to be seen. In any case, one thing is for sure: the dance of revenue round-tripping is far from over, and everyone is keenly watching who will lead the next step.