Buyer Beware Big Tech Gains (and Losses) Boosted By Big AI
Davey Alba & Shirin Ghaffary
Business is booming in Big Tech, and that's now showing up in big (and unique) ways on profit and loss statements, in part driven by their own investments in Big AI:
Alphabet and Amazon were rewarded by investors for reporting better-than-expected third-quarter profits. At both companies, earnings were boosted by the increased value of their stakes in Anthropic PBC, maker of the popular Claude chatbot.
Alphabet said profit included “net gains on equity securities of $10.7 billion,” in part from a private company. That company is Anthropic, according to people familiar with the matter, who declined to be named disclosing non-public information. Meanwhile, Amazon’s third-quarter profit climbed 38%, helped by a $9.5 billion pretax gain from its investment in Anthropic. The higher value was reflected in Amazon’s nonoperating income for the period, the company said in its Thursday earnings report.
This is nothing new – see also: Google's recent rise in "profit" thanks to a mark-up that was seemingly tied to SpaceX – but the scale and speed at which the Big AI companies are raising (and just how intertwined Big Tech is in these deals) are causing these reports to happen in even more pronounced ways, more frequently.
The surge of investment in private-company generative AI is beginning to show up in public-company metrics. Once seen mainly as strategic bets on a fast-moving frontier, stakes in AI startups are now contributing sizable, if still paper, profits to some of the world’s biggest businesses — even as the technology itself is only starting to pay commercial dividends.
The "paper" part is key here. While this is being reported as income per GAAP guidelines, there's no actual profit here. At least not yet. Google doesn't see $10.7B more in cash coming in, nor does Amazon see $9.5B more in their bank account. These are simply on paper markups of their holdings. Yes, it's a little silly, but the alternative is also silly:
Microsoft, meanwhile, said in reporting its own quarterly earnings this week that its net income was reduced by $3.1 billion to account for losses suffered by OpenAI. The software company has backed the ChatGPT maker with $13.75 billion, and holds a 27% stake.
Wait, Microsoft is reporting billions in "losses" while Google and Amazon are reporting billions in "gains"? Even though both are tied to investments being marked up by billions? Yes, it's because Microsoft is using a different accounting guideline – the "equity method" – which states that they should take the pro rata portion of the profits or losses (so, losses) that OpenAI has each quarter.
This is how Matt Rosoff was able to back into the losses OpenAI likely saw last quarter for The Register, even though, as a private company, they don't have to report them. It's just math. (Though complicated somewhat by Microsoft's humorously disclosed 32.5% stake before it was diluted by the most recent OpenAI equity raises – and, of course, taxes. Big companies, they're just like us, getting screwed by taxes.)
Anyway, Google and Amazon are using the fair market value (FMV) rules for their investment, which means they have to show the mark up (or mark down) when something changes the value of their holdings. That's even more complicated if there's no financing event but simply those companies deciding the value of their holdings should be worth less (or more – though it's almost always less if they're determining it themselves, sometimes for tax reasons). This is more common with banks (which is why you see reports around the big ones marking down their holdings in various startups), but certainly can happen with these Big Tech shareholders too.
But wait, why can Microsoft use one method and Google/Amazon another? I'm no accountant, but it seems tied to the relationship the companies have with their investments. While Microsoft obviously doesn't have a controlling stake, they perhaps are deemed to have significant sway over the company given the cloud relationship and the revenue (and profit) sharing arrangements. So even though Microsoft has "just" a 27% stake in OpenAI while my own math puts Amazon at a roughly 22% stake in Anthropic (though this was before a recent funding round, so that's probably been diluted), and Google has/had a 14% stake in Anthropic, they view them as different types of investments from an accounting perspective.
Again, I'm not sure either is particularly useful when it comes to reporting profits and losses – Microsoft didn't actually lose any of their money due to OpenAI's losses just as Google and Amazon didn't make any actual money due to Anthropic's mark up in valuation – but it is what it is. Just be mindful when you see these massive profit gains (or hits) in the quarterly reports.
One more thing: You may have also noticed Meta's massive one-time profit hit this quarter, which they attributed to a change in future tax liability due to the "Big Beautiful Bill", and were wondering why the rest of Big Tech didn't fall victim to this change and charge as well – I know I was! That, it seems, stems from the fact that Meta's peers are better insulted from such changes because they all operate (at least with footprints in different countries and where IP is held) more globally, and have taken steps in advance to dampen such effects...