By Jeffrey Goldfarb

Amazon.com AMZN boss Andy Jassy had plenty to say about the e-commerce giant’s latest financial results, just not much about the single biggest thing that drove the bottom line. A revaluation of the company’s stake in artificial intelligence startup Anthropic added $9.5 billion of net income, nearly as much as the so-called everything store reaped from online retailing or its enormous web services business. The murkiness introduced by such accounting is especially unwelcome during a market mania.

A 150-page report laying out Amazon’s finances over the third quarter mentions Anthropic nine times. The adjustment to the investment’s unrealized gain is tersely attributed to “observable changes in prices.” Presumably, this refers to the $13 billion Anthropic raised in September from more than 20 investors, including Fidelity, TPG and Coatue, which imputed a $183 billion valuation including the new money.

Before the year ends, Amazon intends to put another $1.4 billion into Anthropic, fulfilling an agreement inked last year to bring its total investment to $8 billion. This is in the form of convertible notes, some of which have already switched into preferred equity. Amazon estimates the total fair value of the $6.6 billion it has injected so far at approximately $39 billion as of September 30. This implies a 21% stake, within the range at which a more expansive form of accounting, dubbed the equity method, is typically adopted, but Amazon doesn’t disclose how it derived its valuation, so the ownership percentage might be lower. Its Anthropic holding is also non-voting and Amazon has no board presence.

Although these can seem like befuddling technicalities, the sheer size of the stake combined with laconic explanation is jarring. Other business dealings between the two also muddy matters further. Anthropic, whose Claude chatbot aims to be safer and more reliable than peers, agreed to use Amazon Web Services as its main cloud provider for mission-critical work. How much revenue is involved creates another blind spot that compounds the difficulty of assessing Amazon’s earnings. Roth Capital analysts estimate that Anthropic will spend more than $5 billion at Amazon next year, considerably more than it calculated for this year and 3% of the expected top line at AWS, the company’s most profitable and lynchpin division.

This vexing accounting issue will persist. Microsoft MSFT and Nvidia NVDA said last month that they would invest up to $15 billion in Anthropic in exchange for $30 billion of equipment and services. The deal nearly doubled the AI lab’s valuation to $350 billion, according to CNBC, a harbinger of another adjustment to Amazon’s quarterly income.

The boilerplate language in Amazon’s public documents echoes what other companies use to describe their respective minority holdings. Amazon also says its investment in Anthropic is “separate and distinct” from the commercial relationship and that its financial reporting aligns with Securities and Exchange Commission guidance. “Any suggestion that our level of disclosure related to Anthropic is misleading is wrong,” a company spokesperson said in a statement to Breakingviews.

Yet it’s a frustratingly familiar intrusion of volatile private-market opacity into what should be tractable public reports for anyone familiar with previous hype cycles. Chipmaker Intel INTC held stakes in more than 350 internet-related companies in 1999 and Microsoft plowed money into AT&T T, Nextel and other telecom operators that flattered net income for a while. By the time boom turned to bust, complex and interconnected agreements between vendors and customers were clearly magnifying market distortions. Tech firms got swept up in the mania and came under fire. Microsoft, for one, settled with the Securities and Exchange Commission in 2002 for allegedly failing to follow GAAP.

It’s not even necessary to go back that far to find bubble-driven accounting headaches. In the first nine months of 2021, Amazon scarcely mentioned its chunky investment in Rivian Automotive RIVN in quarterly reports. The electric-vehicle manufacturer’s stock market debut then flattered Amazon’s net income by about $12 billion in the fourth quarter, before disappointing forecasts led to a nearly $8 billion loss a few months later.

Anthropic is on a similarly meteoric rise, with media reports already indicating the possibility of an initial public offering in 2026. It’s also evident, however, that AI remains in its formative stages, making it even more important to understand valuation assessments. Investors could use the help: Amazon’s shares rocketed 14% after it reported third-quarter results, only for the uplift to vanish and then some within a few weeks. More fulsome disclosure might help dispel any hallucinations.

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