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Comment by JCM9 | Hacker News Reader

These deals all look like classic “round tripping.” Is there any evidence that this activity is generating actual net new $ that didn’t exist previously?

Amazon’s recent earnings was full of apparent round tripping.

1. Amazon “invests” in Anthropic (cost)

2. Anthropic takes that money and buys AWS (same dollars come back as revenue)

3. Amazon builds big datacenter for Anthropic (cost)

4. Amazon records a large paper “profit” because the value of the Anthropic “investment” went up after all the stuff it’s doing with the “investment” from Amazon

Meanwhile none of the above appears to actually be making any actual profit in terms of revenues > costs.

It’s bonkers. These are the same sort of shenanigans that were going on with infrastructure prior to the .com implosion. Did we learn nothing?

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Access to infrastructure is a core part of the AI business.

If you are a startup, and you want to buy AI infrastructure, you would typically sell equity to a VC and use that money to buy infrastructure.

If the AI infrastructure vendor would offer to buy that equity, rather than a VC, that’s preferable because you may get ongoing special treatment from the vendor once they have a stake. So it’ a great deal for the startup.

For the infra vendor- you can likely get a good deal on the investment, you get some exposure to higher upside, and it may be useful to manage your cash flow.

Seems like strategic high value moves to me. It’s no wonder the market likes it

You just described round tripping.

The problem is that no 3rd party seems willing to just invest cash because they believe these companies are currently a good investment. That’s what’s raising alarm bells.

I’m not disagreeing, but do the AI companies want cash? If their main expenditure is infra, maybe they’re only seeking investment from AWS/Azure/GCP etc. How would an extra billion from the Saudis buy them that a billion from Amazon wouldn’t?

I’m not a fan of round tripping by any means. Just wondering if what you’re saying is true.

Why would AI companies prefer $1 billion of Nvidia credits over $1 billion cash?

Liquidity preference.

This might be a bit too convoluted, but here is a way to get straight to the point. Assume there is a perfectly liquid asset and its nominal value is $1 million. Now imagine you have stocks that are worth $1 million, but the market price fluctuates over time.

The market price of the perfectly liquid asset is always the mean, the variance is zero. The value of the stock follows a probability distribution, e.g. a Gaussian distribution. The mean is the same, but the variance means that you can't just sell the asset at any time you want.

Even when the nominal value is the same, people prefer more liquid assets over less liquid assets. The reason is obvious. More liquid assets can buy less liquid assets at face value, meanwhile less liquid assets require you to find a willing buyer to trade, which is costly both in time and effort spent on planning the transaction. If you're impatient, you'll have to sell your asset at a discount.

The opposite is also true. If you are an investor, you prefer handing out less liquid assets first, such as credits that can only be used to buy your own products.

Investors are non fungible. Partnering w/ your supplier can provide benefits such as preferential treatment and early access to hardware that are non-monetary but enormously valuable.

> The problem is that no 3rd party seems willing to just invest cash

It seems to me that these AI companies are seeing no shortage of cash investments either.

Deals based on creative accounting are a reliable sign a bubble is about to burst. That’s why folks are calling out these deals.

When finance folks come up with creative solutions to problems, bad things happen.

Here the “problem” is that these AI companies don’t have enough money to buy things and the traditional pool of investors that would give cash and then sit on the sidelines has dried up. Normally in that scenario companies just go bust.

To keep throwing fuel on the fire suppliers are stepping in the “invest” so AI startups can buy the supplier’s goods. History says that’s a terrible idea.

Markets correct craziness in the end, everyone will wonder how this mess ever happened, hearings will be held, and a range of new regulations will be introduced to prevent this sort of thing from happening again. Then finance folks will come up with some new way with finance to be less boring and the cycle brings anew.

> 4. Amazon records a large paper “profit” because the value of the Anthropic “investment” went up after all the stuff it’s doing with the “investment” from Amazon

This will be offset against the cost of the initial investment, though?

So the initial investment is free! Lunch is served!!

Well - it's potentially a good deal for the supplier if they can buy ownership of companies downstream of them through their supplies.

It sure is

I think the initial investment are calculated as CapEx, not revenue: t.ly/NO52v

The OpenAI / AMD deal was even crazier. This stuff is all good, until it’s not. Then everything implodes as not only does the “revenue” go away, but then companies take big write downs from the value of the investments they previously counted as income.

In the case of Nvidia and Poolside, isn't it more like: Poolside pays part of Nvidia's made up price for chips with some of Poolside's imaginary value stock?

I recently listened to a podcast episode about Enron, and one of the red flags was that they reported profits on paper, but didn't generate cash flow proportional to their profits.

Both Amazon and Nvidia probably don't need the cash flow right now, which is why they can get away with it. It'll be interesting to see what happens if their cashflow ever runs dry.

I've heard the business term as a "reciprocal agreement" a common behavior of large companies would be to award a large contract for IT services to a 3rd party and then that company would assist in getting a market foothold in their home country, like India.

I agree big time.

This distorts the markets, undermines financial disclosures, and probably stifles innovation. In your example, when Amazon invests in Anthropic, do they then get voting shares and a say where the opex go?

(Rhetorical) Why are we okay with building these card houses?

    Meanwhile none of the above appears to actually be making any actual profit in terms of revenues > costs.

When the investment pays back with interest?

When Anthropic pays opex for using the data centers?

I'm not an economist or accountant so take this with a pinch of salt, but this basically transforms Amazon money into datacentres with a guaranteed customer. That's your profit right there.

There’s a whole generation now that wasn’t in the trenches for the .com bust or 2008 crisis that’s blissfully unaware of what’s about to transpire when everything that’s been going on unravels.

Isn’t the same with any business just a bit more indirect? So at what threshold is “Fine” and when is not?

1 to 1 cycle: bad 1 to 1 to 1 cycle: good?

…?

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