Big Tech's Anthropic, OpenAI stakes distort S&P earnings picture

Investor Alert: Tech Giants’ Anthropic and OpenAI Holdings Impact Reported Earnings Results

Imagine if you looked at your report card and saw straight A’s, but later found out some of those grades came from bonus points, not your real test scores. That’s kind of what’s happening with big tech companies and their profits right now, and it matters a lot for investors.

Why Investors Should Care

Big tech firms like Microsoft, Amazon, and Alphabet (Google’s parent) just reported very high profits. But a lot of these “profits” come from their investments in private AI companies, like OpenAI and Anthropic – not from selling products or services. It’s like getting a gold star for something you own, not something you made.

This is important because these extra profits make the whole stock market look stronger than it really is. If you invest in the market or own tech stocks, you need to know what’s really driving those numbers.

The Bull Case: Why Some See This as Good

  • Big wins from smart investments: Tech giants invested early in AI companies, and now those companies are worth a lot more. For example, Anthropic and OpenAI are each valued near $1 trillion (Wall Street Journal).
  • Boosts to earnings: These gains help companies report higher profits, which can lift their stock prices and help investors in the short term.
  • Strong underlying performance: Even if you remove the investment gains, many tech companies are still growing fast. Some analysts call these extra profits “sprinkles” on an already good cake.

The Bear Case: Why Some Are Wary

  • Not from main business: These profits don’t come from selling more products or services. They’re from changes in the value of investments, which can go up or down quickly.
  • Market looks stronger than it is: Without these one-time gains, earnings growth for the S&P 500 would be much lower – closer to 29% instead of 48%, according to LSEG (LSEG).
  • Can reverse fast: If those private company values drop, profits could fall just as quickly. For example, SpaceX’s value dropped 50% after its IPO.
  • Confusing reporting: Different companies report these gains in different ways, making it hard for investors to compare.
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What History Tells Us

This isn’t the first time investment gains have skewed profit reports. During the dot-com boom in the late 1990s, many companies looked richer on paper thanks to tech stock investments – but when the bubble burst, those “profits” vanished quickly. According to a study by the National Bureau of Economic Research, non-operating earnings can make markets look riskier than they are.

What’s Going On With Specific Companies?

  • Amazon: Saw a 240% jump in earnings, but without Anthropic and OpenAI investments, it would have been closer to 17%.
  • Alphabet: Reported 300% profit growth, but only 23% without its SpaceX and Anthropic stakes.
  • Microsoft: Got a $3.2 billion boost from Anthropic, and a $480 million gain from OpenAI.

These companies’ earnings are now closely tied to private AI companies, which haven’t even gone public yet. If those companies’ values change, the profits could swing wildly.

Pros and Cons for the Market

  • Pro: Higher reported earnings can lift stock prices and help investor confidence.
  • Con: These profits are unpredictable and could disappear if the private company values drop.
  • Pro: The tech sector still shows real growth, even without the investment gains.
  • Con: Investors might not see the true strength of a company’s core business.

Investor Takeaway

  • Dig deeper than headlines: Look at where profits are coming from – not just the total number.
  • Watch for volatility: Investment gains can disappear fast. Be cautious if a company’s profits rely heavily on them.
  • Focus on core growth: Study how much a company earns from its main business, not just investments.
  • Balance your portfolio: Don’t put all your money in one sector, especially when a few big companies drive most of the market gains.
  • Stay updated: These private AI companies could go public soon, which might change the game again for tech stocks.

For the full original report, see CNBC

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