Investments in AI startups have generated $160 billion in profits for Big Tech companies. What is the risk?

Big Tech companies earned $160 billion in additional profits last quarter thanks to the rising value of their stakes in other AI companies, according to the Financial Times. This boosted their financial results but raised concerns that the true scale of the AI boom may be overstated. Analysts surveyed by the FT warn that “paper” profits risk distorting the financial picture at a time when investors are closely scrutinizing the IT sector’s earnings to assess the health of the AI ecosystem.

In the second quarter, the largest tech companies reported more than $160 billion in “other income,” a category that includes profits from investments in other companies. In the first quarter, that figure was $69 billion, according to the FT.

For example, Alphabet’s “other revenue” more than doubled compared to the previous reporting period—to $97.9 billion—while Amazon’s more than tripled—to $53.4 billion. The sharp increase is mainly due to the revaluation of the big tech companies’ stakes in AI giants SpaceX and Anthropic, the publication notes. This was the main driver behind the record profits reported by both hyperscalers, rather than new business ventures or additional cash flow, the FT points out.

Nvidia, which has a large portfolio of equity investments, disclosed at the end of June that it held nearly 123 million shares of SpaceX. In the most recent fiscal quarter, which ended in July, the chipmaker reported $7.7 billion in “other income.” In the previous quarter, that figure had reached $15.9 billion—driven by an increase in the value of the company’s Intel holdings.

Accounting rules require companies to recognize changes in the value of equity investments in their financial statements as part of profit or loss. However, when it comes to investments in private startups, revaluation occurs only after new rounds of financing. The value of publicly traded assets is adjusted at the end of each quarter.

In the most recent reporting period, Big Tech revenues surged following SpaceX’s IPO in June, the FT notes. After the acquisition of xAI, the valuation of Elon Musk’s rocket and space company reached $1.25 trillion, Bloomberg reported. According to MarketWatch, as of August 31, its market capitalization stood at over $1.9 trillion. Thus, the IPO delivered massive gains for early investors, including Nvidia and Alphabet.

The upcoming IPOs of Anthropic and OpenAI could lead to further spikes.

Analysts emphasize that while core earnings in the U.S. technology sector remain high, the uneven nature of returns on AI investments makes it difficult to get an objective picture, according to the FT.

Ben Snyder, chief U.S. equity strategist at Goldman Sachs, noted that investors began questioning the cyclical nature of Big Tech revenue a couple of years ago. Now, he said, earnings growth raises the question of whether it is based on real demand, underlying demand, or whether “the metrics are, in a sense, misleading.”

Manish Kabra, head of U.S. equity strategy at Société Générale, believes that these earnings have raised “questions about the quality of profits.” As a result, the market has already lowered these companies’ P/E ratios from around 25 to 20. “Investments within the technology sector are indeed causing concern,” he said.

Kasper Elmgreen, Director of Fixed and Equity Investments at Nordea Asset Management, stated that first-half earnings “significantly overstated companies’ sustainable ability to generate profits,” and that the interdependence of these earnings within the AI sector requires close scrutiny.

Federated Hermes strategist Louise Dudley noted that “the magnitude of the adjustments is hard to ignore,” which complicates the analysis and “undoubtedly introduces additional risk.” Nevertheless, the companies “deserve some credit for investing in and partnering with highly successful businesses,” she added.

Scott Kronert, a U.S. equity strategist at Citi, warned that large one-time revaluations of equity could lead to unpleasant surprises. “The contribution this makes to earnings sets the stage for a potential decline next year,” he said.

This article was AI-translated and verified by a human editor