TECH

Big Tech and potential stock market vulnerability

Tech giants like Amazon and Alphabet have driven the stock market to record highs in recent years, fueled by the growth of their artificial intelligence and cloud computing businesses. However, in recent months, a significant portion of these two companies' profits has come from an unusual source: the appreciation of their equity stakes in artificial intelligence companies.

More than 70% of Alphabet's quarterly net income came from investments in other companies—specifically Elon Musk's SpaceX—according to a recent regulatory filing and an analysis by Satori Insights, a financial market research firm. SpaceX went public in June in the largest initial public offering (IPO) in history.

Investment gains also accounted for about 65% of Amazon's net income, largely stemming from its stake in Anthropic, a leading artificial intelligence startup that also plans to go public.

These gains highlight a growing vulnerability in the stock market as a whole: the companies continuing to drive the market upward are increasingly dependent on each other's success.

"It’s circular," said Matt King, founder of Satori Insights. "What is funding artificial intelligence is, increasingly, artificial intelligence itself."

Concerns regarding the circular nature of the AI ​​boom have persisted for some time as investors watch dominant tech giants, chipmakers, and AI labs invest in or lend money to one another.

This money is often used to purchase cloud computing products or services from the very companies providing the funding.

Executives in the AI ​​sector have defended these circular funding models. Sam Altman, CEO of OpenAI, described the deals as a creative way to unlock the capital needed to accelerate innovation during a time of rapid transformation. But the investment gains recorded by Alphabet and Amazon show how the financial performance of these companies is increasingly intertwined. They also point to the growing interconnection between the stock market and the broader economy: artificial intelligence is driving growth in both, making the threat of a sharp stock market drop an even greater concern for economic policymakers.

"The stock market has never been merely a reflection of the economy, but it has now become one of the economy's main engines," said King.

Unrealized investment gains are factored into a company's profit based on the value of its holdings at the end of each quarter. Unless the company sells any of these holdings, the gains exist only on paper.

The mechanism works in reverse as well: a drop in the value of investments during a quarter can reduce the profits reported by the company.

Alphabet and Amazon did not respond to requests for comment.

They are part of a small group of technology companies closely watched by the market—dubbed the "Magnificent Seven"—which also includes Microsoft, Meta, Apple, Tesla, and Nvidia. The group has become a benchmark for the tech-driven stock market rally, and many investors prefer to analyze the seven companies collectively.

In total, the Magnificent Seven recorded $315.6 billion in net income for the second quarter. This period corresponds to the three months ending in June for all the companies, except Nvidia, which follows a slightly different fiscal year.

Of that total, $134.6 billion—or about 42%—came from investment gains, according to calculations by King, who adjusted the figures reported by the companies to account for taxes. The other sources of net income are typically revenues from the sale of products and services.

Without these investment gains, the group's profits would have remained roughly at the same level as the previous quarter—meaning they would not have grown—according to King. Microsoft, Meta, Apple, and Tesla did not record comparable revenue from investments.

Nvidia recorded approximately $13 billion in investment gains in the most recent quarter. The chipmaker holds stakes in OpenAI and Anthropic, as well as investments in other artificial intelligence-related companies—including CoreWeave and Applied Digital—that lease access to data centers equipped with high-capacity processors for AI model development.

Investment gains for the seven companies in the second quarter accounted for a much larger share of total profits than the 5% recorded in the previous quarter, according to King's calculations.

Going forward, investment gains from these tech companies' holdings may continue to fluctuate as some of the private companies they invest in go public.

The gains announced by Alphabet, Google's parent company, appear to be largely attributable to its investment in SpaceX, Elon Musk's space exploration and artificial intelligence company. The company recorded nearly $80 billion in pre-tax profit from investments in restricted equity securities and reported holding $94.1 billion in SpaceX shares.

mundophone