The Curious Case of Wall Street's Revenue Round-Tripping Concerns
Wall Street is buzzing with concerns over the cloud revenue numbers of big tech giants, specifically questioning whether the growth is authentically organic or being artificially inflated through strategic investments in AI startups and related projects. Analysts and investors are wary of a practice known as “Revenue round tripping,” where a big tech company invests in an AI startup, and in return, that startup purchases cloud and AI services from the same big tech company. This kind of financial dance is dubbed “Round tripping” as the money invested circles back in the form of cloud expenditure, essentially implying that big tech firms are essentially purchasing cloud growth through these startup collaborations.
The landscape was stirred when Amazon Web Services poured a substantial $4 billion into Anthropic, with the stipulation that Anthropic would designate AWS as its “Primary cloud provider.” Google and Microsoft followed a similar playbook with investments in OpenAI and Cohere, respectively, subsequently becoming their designated cloud partners. Oracle also swiftly partnered with Cohere post its investment in the startup. Business Insider was the first to bring these concerns to light, as prominent investors began to express apprehensions about how these intricate deals might be artificially inflating cloud revenue numbers.
The ambiguity around whether revenue figures encompass the training of AI models by these startups on the big tech companies’ cloud infrastructure further muddies the waters. RBC highlighted Microsoft as a potential outlier in this scenario, citing the company’s transparency in not recognizing revenue from OpenAI training its GPT models on Azure’s cloud infrastructure. The slowing growth in cloud spending in recent years, amidst economic challenges and high inflation, raises red flags regarding the accuracy of the reported cloud revenue numbers. If a significant portion of the recovery is indeed a result of revenue round-tripping deals, the rosy cloud narrative painted may not be as sunny as it appears.
The intricacies of these investments and partnerships underscore the complexity of the tech industry’s financial ecosystem. Transparency and clarity in reporting revenue figures will be crucial for maintaining investor trust and ensuring market stability. As the tech giants navigate this evolving landscape, the scrutiny on cloud revenue numbers is likely to intensify, prompting a deeper dive into the nuances of these strategic alliances and their impact on financial disclosures. The future trajectory of cloud revenue growth for big tech firms will undoubtedly be closely monitored by investors and analysts alike, as they seek to decipher the true underlying trends driving this critical sector of the industry.
