Why one funding round at Anthropic made Google and Amazon record-breakingly profitable
The record Q2 profits for Alphabet $GOOG and Amazon $AMZN are largely not cash. I think it's useful to understand how they came about.
Alphabet reported net income of $112.1 billion, almost a fourfold increase year-over-year. Revaluation of stakes in unlisted companies brought in $99 billion pre-tax, and after tax, $77.1 billion remained in net income, adding $6.26 per share. In the same quarter last year, that item was $1.3 billion. Alphabet doesn't specify what the revaluation relates to; besides Anthropic, its portfolio also includes SpaceX.
Amazon reported $62.6 billion in net income and itself writes in the report that it includes a non-operating pre-tax gain of $53.4 billion primarily from its investment in Anthropic.
How is such a value even calculated when Anthropic isn't publicly traded? Accounting rules say that the stake sits on the books at cost and doesn't move until an observable transaction occurs. That is typically a new funding round. In February, Anthropic closed Series G, raising $30 billion, and its valuation was $380 billion. At the end of May, Series H came, another $65 billion, and the valuation jumped to $965 billion. Only then did a price emerge by which both companies were allowed to mark up their stake, and the difference fell into their income statement.
Alphabet holds around 14% of Anthropic, Amazon around 21%, but neither company states the exact amount in their reports. Yet Amazon saw less fall into its income statement. There are two reasons. It holds not only shares but also convertible bonds, which are valued differently than a pure equity stake, and it booked a portion already in Q1, when roughly $15.6 billion fell into the same item. Moreover, for Alphabet, that $99 billion isn't just from Anthropic.
The whole thing is best summarized by one contrast at Amazon. Over the last twelve months, it reported net income of $135.3 billion, but free cash flow was negative $7.6 billion, because it sent $66.1 billion more into capital expenditures than the year before. Reported profit and the cash actually left over are currently moving in opposite directions.
It's easier to understand with a small example. You once gave a million for a tenth of a friend's company, which at the time was worth ten million. In your accounting, that stake sits as a million, and it stays there even as the company's revenues grow. Only when an outside investor comes in at a valuation of fifty million can you write your tenth up to five million. That four million difference flows through profit, even though you sold nothing and no one sent you any money.
This implies why it works both ways. If no new round comes in a given quarter, the stake value doesn't budge, and the effect is zero, no matter how much Anthropic grows. And if next time a round comes at a lower valuation, a loss of the same caliber sits in the same line. In my opinion, for both companies it makes no sense to look at accounting profit at all. At Amazon, accounting EPS was $5.75, but after excluding that item, it was roughly $1.97, even though it's the same quarter and the same business.
The difference is clearest at Microsoft $MSFT , which holds both major labs on its books. From its Anthropic investment, it booked $3.2 billion for the same quarter, because the same May round lifted it. In OpenAI it holds about 27%, but there it uses the equity method, which tracks the company's financial performance instead of its valuation. Only $480 million from it fell into results. One company, one quarter, two methods. Moreover, Microsoft itself excludes OpenAI's impact from its adjusted earnings.
How do you read this? Do you consider the revaluation legitimate information that the companies' asset values grew, or do you skip it outright when reading results?