Wall Street is increasingly sounding the alarm over the cloud revenue numbers of big tech companies, raising concerns about whether growth in this sector is being artificially inflated through substantial investments in AI startups and related projects. Analysts and investors have coined the term “Revenue round tripping” to describe the scenario where a tech giant invests in an AI startup, only for that startup to funnel money back to the tech giant by purchasing its cloud and AI services. This circular flow of cash makes it appear as though the tech company is experiencing robust growth in its cloud division, when in reality, it’s just a financial merry-go-round.
Take Amazon Web Services (AWS), for example. The cloud titan recently invested a whopping $4 billion in Anthropic, an AI startup. Not coincidentally, Anthropic agreed to use AWS as its primary cloud provider. Google and Microsoft have orchestrated similar deals, with Google investing in AI ventures that subsequently use Google Cloud Platform (GCP) services and Microsoft pouring capital into OpenAI, which relies heavily on Azure.
Even Oracle has joined the fray by becoming the cloud partner for Cohere shortly after investing in the AI upstart. Last year, Business Insider first shed light on these cozy arrangements, capturing the attention of high-profile investors concerned about the potential for artificially inflated revenue numbers. Analysts like Jaluria have been vocal about questioning whether AWS’s revenue includes fees from training Anthropic models or if Oracle Cloud Infrastructure (OCI) is reaping financial benefits from training Cohere models. This could significantly affect the comparability between cloud vendors and cast doubt on the narrative of a broad-based recovery in cloud workloads.
Adding more fuel to the fire, the overall growth in cloud spending has been slowing in recent years. Many customers are tightening their belts amid a tepid economy marked by high inflation. If a significant portion of the perceived recovery in cloud spending is due to revenue round-tripping deals, then the reality is far from as rosy as it seems. This gives rise to questions about the actual health of the cloud market and whether these tech giants are merely putting lipstick on a pig.
However, it isn’t all doom and gloom. RBC analysts suggest that Microsoft could be an exception to this trend. According to their findings, Microsoft does not recognize any revenue from OpenAI training its GPT models on Azure’s cloud infrastructure. This sets Microsoft apart and could position it as a more transparent player in the cloud market, providing a glimmer of hope amidst the skepticism.
Despite multiple inquiries, Amazon remains tight-lipped about whether AWS’s revenue numbers include cloud spending by Anthropic. The silence only adds to the intrigue and suspicion surrounding these financial maneuvers. As Wall Street continues to scrutinize these practices, the big question remains: Are we witnessing genuine growth in the cloud sector, or is it merely an elaborate financial illusion? Only time will tell, but for now, investors and analysts alike are keeping a wary eye on the numbers.