In Reply to: But we will have icebreakers and batleships. Losing drone war posted by mh on August 14, 2026 at 11:18:18
The WSJ has an article about this, but it's behind a paywall. It's part of why I think there is a tech bubble. So I asked Claude, and got this answer:
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How are tech company earnings inflated by investments in other tech companies?
Great question — this is a real and underappreciated dynamic in how Big Tech reports earnings. Here are the main mechanisms:
1. Equity Investment Gains (Mark-to-Market)
Under ASC 321 accounting rules, companies must report unrealized gains and losses on equity investments through their income statement each quarter. So if:
-Google owns a stake in a startup that surges in value
-That paper gain flows directly into net income
-Even though no cash changed hands and nothing was sold
This creates massive earnings volatility and inflation — particularly for companies like Alphabet, Microsoft, and Amazon which hold enormous investment portfolios.
2. The Big Examples
Alphabet (Google)
Holds billions in investments through GV (Google Ventures) and CapitalG
Waymo, DeepMind spinoffs, and hundreds of startups
Quarterly earnings regularly swing hundreds of millions based purely on portfolio valuation changes
Amazon
Its stake in Rivian alone caused billions in earnings swings
When Rivian's stock surged post-IPO, Amazon reported massive gains
When Rivian crashed, Amazon reported massive losses
Neither had anything to do with selling books or cloud computing
Microsoft
Large stakes in OpenAI and numerous other ventures
As AI valuations soared, Microsoft's investment portfolio inflated earnings
Apple
Holds a massive securities portfolio
Investment income regularly contributes billions to reported earnings
3. Subsidiary and Affiliate Income
When a tech company owns 20-50% of another company it uses equity method accounting:
They record their proportional share of that company's profits as income
Even if no dividend is paid and no cash is received
Example: If Company A owns 30% of Company B which earns $1 billion, Company A records $300 million in income
(NOTE: The total profit reported for the two companies is $1.3 billion, even though only $1 billion is earned.)
4. Cross-Ownership Creates Circular Inflation
The tech ecosystem has significant cross-investment creating circular effects:
Microsoft invests in OpenAI
Google invests in Anthropic
Amazon invests in both
As AI valuations rise, all their balance sheets and income statements inflate simultaneously
Creates the appearance of broad earnings strength that is partly just mutual appreciation of the same underlying AI hype
5. Strategic Investment Income
Beyond pure financial investments, tech companies structure deals where:
A cloud computing credit is given alongside an investment
The startup uses AWS/Azure/GCP credits, generating revenue for the investor
The investment and the revenue booking are linked but reported separately
Makes both the investment portfolio and cloud revenue look stronger
6. IPO Windfalls
When portfolio companies go public:
Pre-IPO stakes get marked up dramatically
The IPO pop flows through earnings
SoftBank mastered — and was ultimately burned by — this strategy
Creates one-time earnings boosts that analysts must strip out to see underlying performance
How to See Through It
Sophisticated analysts focus on:
Metric Why
Operating income Excludes investment gains/losses
Free cash flow Actual cash generated by the business
Adjusted EPS Strips out non-operating items
Segment reporting Isolates core business performance
The Broader Problem
This dynamic means that during tech bull markets:
Rising valuations inflate earnings across the sector simultaneously
Strong earnings justify higher stock prices
Higher stock prices inflate the portfolio values of cross-investors
Which further inflates earnings — a reflexive loop
And during downturns the reverse happens — falling valuations crush reported earnings even when the underlying business is healthy, creating a doom loop.
Bottom Line
Tech earnings are significantly inflated by investment portfolios in ways that have nothing to do with actual business performance. The biggest names — Alphabet, Microsoft, Amazon — regularly report earnings that include billions in paper gains from their investment arms. Stripping those out often reveals a meaningfully different picture of underlying business health. It's one of the main reasons analysts always emphasize operating income and free cash flow over headline net income for tech companies.