Anthropic and OpenAI's soaring valuations added $53.4 billion to Big Tech earnings in Q2, masking slower underlying growth. The dynamic underscores the intertwined fate of AI startups and their tech backers.
TL;DR
- Big Tech's investments in Anthropic and OpenAI added $53.4 billion to Q2 earnings, boosting reported growth by 19%.
- Without these gains, S&P 500 earnings growth would have been 29%, closer to analyst forecasts of 24%.
- The earnings boost highlights the growing influence of AI startups on Big Tech's financials, even before potential IPOs.
What happened
Anthropic and OpenAI, both valued at nearly $1 trillion in private markets, have significantly boosted the earnings of their Big Tech backers. Microsoft, Amazon, and Alphabet reported substantial investment gains in Q2, with Amazon alone recording a $53.4 billion gain primarily from its Anthropic stake. Alphabet saw a similar dynamic, with its earnings surge largely attributable to gains from SpaceX and Anthropic. Microsoft reported a $3.2 billion gain from its Anthropic investment and a $480 million gain from OpenAI.
These investment gains have had an outsized impact on overall earnings growth. According to LSEG's head of earnings and equity research, Tajinder Dhillon, S&P 500 earnings growth for Q2 is up around 48% year-over-year. However, without the gains from Big Tech's stakes in private AI companies, this growth would be closer to 29%. This adjusted figure is much more in line with analyst forecasts of 24% growth.
The earnings dynamic is particularly notable given the influence of mega-cap tech stocks. The so-called Magnificent Seven names accounted for about 35% of S&P 500 Q2 revenue, highlighting the significant weighting of these stocks in the market. The investment gains tend to be reported under 'other income,' with variations in how different tech companies account for them.
Why it matters
For AI/ML developers and startup founders, the intertwined fate of AI startups and Big Tech underscores the potential for significant financial backing and the importance of strategic partnerships. The substantial investments and gains highlight the competitive landscape and the potential for AI startups to drive growth for their backers.
For tech investors, the earnings boost from AI startups highlights the potential for significant returns from investments in the AI sector. However, it also underscores the volatility and potential risks associated with these investments. The dynamic may balance out with more volatility, as seen with SpaceX's recent performance, which is down roughly 50% from its post-IPO high.
The earnings dynamic raises questions about the sustainability of the current growth trajectory and the potential impact of AI startups' IPOs. A successful Anthropic IPO in September could offset some of the volatility, but it is too early to tell. The underlying earnings growth, even without the inclusion of private assets, is seen as healthy by some analysts, indicating a strong earnings season.
Key facts
- Anthropic and OpenAI are both valued at nearly $1 trillion in private markets.
- Amazon reported a $53.4 billion gain primarily from its Anthropic stake in Q2.
- Alphabet's earnings surge was largely attributable to gains from SpaceX and Anthropic.
- Microsoft reported a $3.2 billion gain from its Anthropic investment and a $480 million gain from OpenAI.
- S&P 500 earnings growth for Q2 is up around 48% year-over-year, but would be closer to 29% without Big Tech's AI investment gains.
- The Magnificent Seven tech stocks accounted for about 35% of S&P 500 Q2 revenue.
- SpaceX is down roughly 50% from its post-IPO high, highlighting potential volatility in investment gains.
- Analysts are excluding these one-time investment gains in their estimates, focusing on underlying earnings growth.
Context
The significant investments and gains from Anthropic and OpenAI highlight the growing influence of AI startups on Big Tech's financials. These startups are increasingly intertwined with their tech backers, even before potential IPOs. The dynamic underscores the competitive landscape and the potential for AI startups to drive growth for their backers.
The earnings boost from AI startups also raises questions about the sustainability of the current growth trajectory. The potential volatility, as seen with SpaceX's recent performance, highlights the risks associated with these investments. The underlying earnings growth, even without the inclusion of private assets, is seen as healthy by some analysts, indicating a strong earnings season.
For AI/ML developers, startup founders, and tech investors, the intertwined fate of AI startups and Big Tech underscores the potential for significant financial backing, strategic partnerships, and significant returns from investments in the AI sector. The dynamic also highlights the importance of understanding the competitive landscape and the potential risks associated with these investments.
