Wall Street’s Revenue Rollercoaster: AI Deals Spark Concerns

Wall Street is abuzz with concerns over big tech companies and their cloud revenue numbers, specifically questioning whether the growth is artificially inflated by hefty investments in AI startups and related projects. Analysts and investors are raising red flags about what they call “Revenue round tripping,” a practice where a big tech giant invests in an AI startup, which in turn procures cloud and AI services from the same tech company. These intricate dealings are termed “Round tripping,” as the money initially invested circles back through cloud spending, almost as if the tech giants are purchasing cloud growth through these startup collaborations.

The recent example of Amazon Web Services pouring $4 billion into Anthropic, with the stipulation that Anthropic designates AWS as its “Primary cloud provider,” sheds light on this dynamic. Similarly, Google and Microsoft also followed suit by investing in AI startups and subsequently becoming their go-to cloud partners. Oracle swiftly secured a cloud partnership with Cohere post-investment. Last year, Business Insider highlighted concerns from prominent investors regarding the potential inflation of cloud revenue figures through such deals. The uncertainty around whether AWS revenue incorporates training Anthropic models or GCP revenue involves training Gemini models internally raises questions about the comparability among cloud vendors and the narrative of a widespread rebound in cloud workloads.

Cloud spending growth has somewhat plateaued in recent years, as businesses seek to cut costs amidst a sluggish economy and soaring inflation rates. If a portion of this growth turnaround stems from revenue round-tripping arrangements, the outlook may not be as optimistic as it seems. Notably, Microsoft has been singled out as an exception by RBC, with the company explicitly stating that it does not recognize revenue from OpenAI training its GPT models on Azure’s cloud infrastructure. On the contrary, an air of ambiguity surrounds Amazon’s stance, as an AWS spokesperson declined to confirm whether Anthropic’s cloud spending inflates AWS revenue figures.

The debate surrounding the authenticity of cloud growth in the tech industry continues to intensify as stakeholders navigate through the complexities of revenue round tripping. As big tech companies forge strategic alliances with AI startups and solidify cloud partnerships, the need for transparency in financial reporting becomes paramount. Ensuring that cloud revenue numbers accurately reflect organic growth rather than artificially inflated figures is crucial for maintaining investor confidence and market stability in the ever-evolving tech landscape.