Microsoft And Amazon Aren't Cheap: Analyst Says Earnings 'Mirage' Driven By OpenAI, Anthropic Dominating 50% Of Cloud Backlog
Amazon.com, Inc. AMZN | 0.00 | |
Alphabet Inc. Class C GOOG | 0.00 | |
Alphabet Inc. Class A GOOGL | 0.00 | |
Roundhill Magnificent Seven ETF MAGS | 0.00 | |
Microsoft Corporation MSFT | 0.00 |
Big Tech valuations are facing intense scrutiny as a financial commentator warns that hyperscalers’ earnings are being artificially inflated by circular cloud computing contracts with AI giants OpenAI and Anthropic.
‘Total Mirage’ In Cloud Revenues
Recent data reveals a staggering dependency on just two artificial intelligence (AI) companies. A chart detailing the cloud backlogs of major U.S. providers shows that OpenAI and Anthropic account for roughly half of their future revenue commitments.
Specifically, these AI startups make up 49% of Microsoft Corp.‘s (NASDAQ:MSFT) $627 billion backlog and an estimated 51% of Amazon.com Inc.‘s (NASDAQ:AMZN) $464 billion backlog.
Alphabet Inc.‘s (NASDAQ:GOOG) (NASDAQ:GOOGL) Google and Oracle Corp. (NYSE:ORCL) show similar reliance, at 43% and 54%, respectively.
Equity Analyst at Porter and Company, Ross Hendricks, argues that this deep concentration makes the heavily touted Price-to-Earnings (P/E) ratios of tech giants highly deceptive. According to Hendricks, calling stocks like Amazon, Microsoft, Alphabet, and Meta “cheap” relies on an “E” (Earnings) that is currently a “total mirage.”
Circular AI Cash Loop
The core of the issue lies in how these tech behemoths are essentially funding their own top-line revenue.
Hendricks highlighted the cyclical nature of these massive AI partnerships: “Hyperscalers give OpenAI/Anthropic cash to pay for hyperscaler computing capacity. That cash then circles right back around into the ‘earnings’ of the hyperscalers.”
While these cloud revenue backlogs look incredibly robust on paper, the underlying financials tell a potentially dangerous story. Hendricks noted that free cash flow for this group has “officially gone negative,” forcing these companies to raise record amounts of debt to plug “gaping holes” in their financial statements.
Bubble Is In The Earnings
This reliance on a closed loop of AI funding raises serious questions about the sustainability of current Big Tech valuations. Hendricks offered a stark warning to retail and institutional investors buying into the ongoing AI hype cycle.
“I repeat, the bubble is in the ‘e’ not the ‘p’ in today’s PE ratios,” Hendricks stated. He heavily criticized mainstream market commentators, adding that the “hucksters and talking heads will, as always, fail to realize until it’s too late.”
As the AI spending frenzy continues unabated, the ultimate fallout of this financial strategy remains uncertain, or as Hendricks simply cautioned: “hint: not well, bob!”
Here’s a list of a few AI-linked ETFs and their performance for investors to consider.
| ETF Name | 6-Month Performance | YTD Performance | One Year Performance |
| iShares US Technology ETF (NYSE:IYW) | 10.59% | 11.75% | 52.58% |
| Fidelity MSCI Information Technology Index ETF (NYSE:FTEC) | 10.35% | 12.35% | 52.02% |
| First Trust Dow Jones Internet Index Fund (NYSE:FDN) | -3.34% | -1.29% | 12.34% |
| iShares Expanded Tech Sector ETF (NYSE:IGM) | 12.15% | 14.23% | 54.10% |
| iShares Global Tech ETF (NYSE:IXN) | 15.33% | 19.00% | 57.65% |
| Roundhill Magnificent Seven ETF (BATS:MAGS) | 0.04% | 1.05% | 41.17% |
Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.
Photo courtesy: Shutterstock