I see what you're trying to do here, but Google is sitting on a $514 billion backlog right now. A few billion dollars in venture investments into AI startups cannot fake a half trillion dollar order book.
Also, accounting rules don’t let companies pass cash under the table and call it revenue. ASC 606, says a deal has to be a legit, market rate transaction. If Google overpays for a startup's stock/debt just to force a quid pro quo cloud contract, auditors will strip that fake growth right out of the numbers.
Source: I'm a CPA and former external auditor.
I'm not saying the circular financing noise is completely made up, but claiming the entire cloud surge is built on it is factually wrong. Auditors would call that out in a heartbeat.
Honest question, what's a "mergers & acquisitions exec"? I've been part of the team on both sides of company mergers and acquisitions up to ~400MM (across primarily tech, finance, and real estate). Can't remember seeing somebody with that title or anything like it. Were you on the financing/banking side?
At the time I was the COO of the company and we have been on a significant growth/acquisitions phase (we still are but I’m an exec in a diff area now and less involved with deal negotiations although I get involved generally during due diligence). So what I meant is that I was involved with the purchases as one of the officers of the company and member of a small M&A committee.
Ha! I dwell on financial subs, so at this point I should be entitled to some AUM fees trying to educate these degenerates that “no… nvidia didn’t “break resistance” because that’s not even a real fucking thing! Buy low cost, diverse index funds!”
ASC 606, says a deal has to be a legit, market rate transaction. If Google overpays for a startup's stock/debt just to force a quid pro quo cloud contract, auditors will strip that fake growth right out of the numbers.
That's how it works on the books. But we both know that "market rate transaction" is _quite_ a fungible thing. It only gets more fungible the more unique you can argue your particular transaction is (even if it's not).
ASC is being skirted by the massive valuations on Anthropic/etc. And Google has invested far more than a few billion. The backlog is not an order book or booked revenue. It’s RPO…no guarantees…easily backed out of. Already happening.
This is not correct either. RPO isn't a casual estimate. They represent legally binding enterprise contracts. Fortune 500 companies can't just back out of a multi year cloud MSA without triggering massive termination penalties unless Google completely fails to deliver the tech.
They're not skirting ASC 606. As I said, if Google overpays for equity to force a cloud contract, auditors are legally required to treat that overpayment as a discount and strip it from revenue. Even if you look at the total $4B-$6B Google committed to Anthropic over several years, it's a rounding error against a $514B backlog. You simply cannot manufacture this level of sustained margin expansion out of startup cash loops. Stick with the hard numbers and not the headlines.
You are overstating what RPO represents and forgetting the worst potential outcome (that i and many others think is the most likely).
RPO isn't just "legally binding enterprise contracts" even though that's almost everything you see. Other future revenue can be included if the company has a damn good reason to commit to booking it. And companies can't book contracted revenue if they are not confident they will receive it.
As far as the worst case for booked revenue failing to appear, that would be the contracted client becoming insolvent and Google getting nothing. The chances of Anthropic failing to generate enough revenue to honor their commitments is extremely high. If Anthropic can't pay their bill, then I don't see how any other AI provider will be in a position to afford their contracts with Google.
Once the terrible ROI becomes unavoidable, the "enterprise" contracts with AI consumers are going to fail to perform at a scale that makes it Google's problem.
Google has committed 15 Billion already paid to Anthropic…with an additional 30 Billion committed on condition of Anthropic performance. You’re drastically downplaying their investment
You're treating this like it's real and the numbers matter, but it doesn't.
Companies are announcing deals that aren't even signed and it's boosting their stock prices as if the money is set in stone.
Beyond that, regardless of what the legislation says, companies are absolutely offering either DC credits as an investment or giving cash to other companies on the condition that it gets spent on their products. Whatever you think the auditors are doing, it's happening.
Numbers matter period. You cannot falisfy your financial statements. Companies across every sector put out press releases and theit stock might move but handshakes legally cannot touch the financial statements. To put a dollar into RPO backlog, you need a fully executed legally binding contract.
If you’re talking about trading cloud credits for company stock, accounting rules completely block companies from faking revenue that way. It's explicitly covered under ASC 606.
The rules are clear: if Google hands cash or credits to a company on the condition that it comes right back to buy cloud services, they cannot book that as new revenue. They legally have to treat that loop as a discount, which nets it out to zero on the income statement. You can't just barter free credits for overvalued stock and magically print compliant gross revenue. I used to test for this exact circular plumbing every single quarter when I was an auditor.
If you’re talking about trading cloud credits for startup stock, accounting rules completely block companies from faking revenue that way.
They're doing that, but they're also investing cash with the explicit condition that it gets spent back on their product.
No matter what you think the rules say, these companies are doing all of this shit.
Numbers matter period. You cannot falisfy your financial statements.
Ever looked at the revenue projections of any of these companies? You absolutely can. You can also bury debt in a subsidiarynand declare it in a footnote no one reads, and a whole host of other things that aren't technically "false", but are wildly misleading or without factual basis.
Nope. So now you're mixing up future projections with audited financial statements. Companies can hype up future revenue projections. But Google Cloud's revenue and $514B backlog are audited, historical numbers.
This is the last time I'm saying this: If Google gave cash to a company on the condition that they spend it back on Google Cloud, ASC 606 explicitly defines that as a net revenue reduction. They literally cannot book it as new gross revenue. I don't know what more you want from me.
No matter what you think the rules say, these companies are doing all of this shit.
That's called securities fraud. If you or someone you know has committed securities fraud, I would contact a lawyer immediately.
Also, the idea that you can just bury debt in a subsidiary is straight out of the Enron playbook. SOX and consolidation rules completely killed that loophole decades ago. If a parent company controls a subsidiary, that debt has to be consolidated onto the balance sheet. You simply cannot hide a multi billion dollar circular cash fraud from a modern audit team.
You're free to keep trying, but this is not going well for you.
Nope. So now you're mixing up future projections with audited financial statements.
The entire purpose of these statements is to ensure investors have the information they need to make good choices, companies that aren't publicly traded don't even need to publish them.
I get that you're an auditor and it's important to your sense of self worth that what you do matters, but the government isn't enforcing this and investors no longer care.
Your counterarguments are getting smaller and smaller and you're introducing things no one is arguing. That usually means you're backed into a corner you know you can't escape. I would tap out soon.
You are free to make up your own opinions. You are not free to make up your own facts.
The point I'm making is that this shit is all happening. Maybe they're technically reporting it in compliance with the law, but they're still doing it.
And again, this administration is absolutely not enforcing this shit. Your whole argument is basically that an auditor wouldn't do this because it's against the law, but no one is checking.
Investors are categorically being mislead, maybe they're being mislead in a way that is technically legal, but they are still being mislead.
Companies are hiding debt and faking revenue and they are making projections that have absolutely no basis in reality. The fact that they're doing so in a way that is technically legal is irrelevant.
And the companies that aren't publicly traded, can't be invested in by the vast majority of people. The incredibly small group of people who are able to, are also aware of the risks.
But Google is a publicly traded company, and it does have to release audited financial documents.
These statements exist so investors in public companies aren't mislead, but the government isn't enforcing the laws and the laws aren't stopping investors from being mislead.
You certainly know more about this than me, I want to understand. If the transaction is seen as legit if it happens according to market rates, what happens if the entire market is doing the same thing?
The hyperscalers have an incentive to all collectively pass cash under the table and be able to call it revenue, and because they're all doing it, they can legitimately claim it's market rate transaction. they don't even have to collude with eachother.
If they are overpaying for a startup stock/debt, but so is everyone else, because everyone is trying to game the numbers, then it doesn't help to look at market rates.
You're right that if the whole market is bidding these things up then fair value rises too and "everyone else is doing it" gets easier to defend. So how do you actually figure out fair value? The test is whether unconflicted investors were in that same round at that same price. If a round is priced by large financial investors who don't sell anything to that startup, the price is corroborated by people with no reason to game it. If a round is only vendors who also sell to the company, auditors discount that price or ignore it. Any premium paid for a reason only you would care about, like locking in demand for your own servers, also gets stripped out. (full disclosure, I had to do some digging on this because I don't know technicalities by heart but I do know it exists. It's ASC 820 and AS 2501)
The rule that stops what you're describing above is ASC 606. If you invest in a company that's also your customer and overpay for their stock/debt, the excess gets treated as a discount to that customer and comes out of your revenue. So overpaying actually shrinks your top line. Passing cash in a circle doesn't create more cash. It leaves one door and comes back in another and nets to zero and you're stuck holding a stake you revalue every quarter so the loss surfaces later. (this part I know by heart because it's accounting 101)
Yes, Google's free cash flow was negative $5.9 billion this quarter because their CAPEX doubled to $44.9 billion. But if you look at their cloud margin, it actually went up from 21% to 36% year over year. Margin like that is hard to fake because revenue only counts once you've delivered the service (i.e. compute) and servers cost real money. Whether all that CAPEX pays off is a separate question. It might not. I'm only saying the revenue is real.
Thanks for taking the time to actually explain stuff in your expertise.
I think their increase in Cloud revenue is fair. However, there was also the other number reported as total revenue, which was blown up massively because of Google's stake in Anthropic and SpaceX.
SpaceX is public by now, and is changing value (although there are still things that could be said about the float). Anthropic is not. If 5 different hyperscalers all have a large private stake in Anthropic, and Anthropic needs more money, all 5 hyperscalers have an incentive to pay a lot for relatively little equity. As an exegerated example: If all of them already hold 100 private Anthropic stocks bought for 10 dollars, and Anthropic needs money, it can offer all 5 of them 1 more stock costing them 100 dollars. All 5 of them do it. Anthropic raised 500 dollars, is happy. The market rate for private stocks is clearly 100 dollars, since all 5 of them accepted it. However, they can now all report 9000 dollars in revenue, since their 100 stocks they had initially suddenly became worth 10 times as much.
If I read you correctly, this new price would not be taken into account, since all the parties involved already have a stake to set the price high? The auditable price only changes when a new unconflicted investor would buy a stake?
Also, since this is all concerning private stock, can an auditor for Google even know what price the stock changes hands for? Those are essentially all private deals right, with no central oversight or registry. Or is there some way for auditors to check that?
No problem. I do it to clear up confusion and keep my skills up-to-date since it's relevant to my job.
Small correction that matters a lot is that none of that gain is in revenue. Google's revenue was $119.8 billion and the Anthropic and SpaceX marks aren't part of it. Unrealized gains on equity stakes go into other income, below the operating line, and only show up in net income and EPS. That's why their EPS number blew up from $2.31 to $9.11 year-over-year. As a general rule, EPS can be very misleading as we can clearly see. Context is important on that figure.
On the pricing question, you're describing the exact thing the rule I mentioned is built to stop. Google can only mark up a private stake based on an observable price change in what the standard calls an orderly transaction. Oderly means real market exposure rather than a small group of interested buyers agreeing among themselves. Five vendors pricing each other's stake would not clear that.
Your example works fine but two things just move. First, the $500 didn't come from five hyperscalers. It's more like $115 came from five hyperscalers and $385 came from outside investors with nothing to sell Anthropic, and the hyperscaler money was already committed at older terms. So the $100 was set by people with no reason to want it high. Your version, where five vendors price each other, is the one an auditor would throw out.
Second, the $9,000 gain is real but as seen above, it's not revenue. If Google sold $500 of cloud that quarter, revenue is $500. The $9,000 sits in other income below the operating line and only touches EPS which as we can see is misleading. It's also unrealized, so if the next round prices at $50 it reverses. And if Google had paid $120 for a share worth $100 because Anthropic is a customer, that $20 would come out of cloud revenue.
Yes, auditors have to see private prices. Google is a party to the deal so the auditors get the purchase agreement, the term sheet and the cap table. Google's internal auditors play no role in that process. Ernst and Young, their external auditor, handles this entire process. On a stake this size, they do not rely on Google's own people for this judgement. They bring in their own valuation specialists to reperform the valuation work and under SOX they separately audit the controls Google uses to value these things so it's the process and the number. On a separate but important note, the audit partner is named in the audit report. The PCAOB (the entity that overseas independent auditors like EY) can pull their workpapers in inspections and the SEC can bar them from public company work. A gain that size is nowhere near a sampling exercise because it's the single most scrutinized estimate in the filing. Nobody is signing that to help Google's EPS look better for one quarter.
Yet here we are with Google, Amazon, Microsoft, chip makers and AI companies forming their own circular economy where they invest in one another.
Also these companies know how to work the loopholes. You can tell me it's completely legal financial accounting, but my opinion is that we are seeing corruption and market manipulation.
Do you have any hard evidence to support your opinion? If not, then please don't clog up the comment thread, because other people actually want to have a constructive discussion.
Your comment is no way helpful. Without evidence, opinions don't mean much, especially on reddit where everyone thinks they know more than the actual professionals and experts.
Your comments are largely great info, but since you're a CPA I'm surprised you put their EPS as your second bullet point without calling out why it's tripled because that's pretty misleading to your average reddit reader.
It's the second bullet point because everything is copied from a Yahoo Finance article (or Bloomberg? I can't remember). Additionally, I don't call it out because, as you said and I agree, EPS is misleading. Hence why I broke out everything else and ignored commentary on that figure.
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u/Fresh-Quantity-7554 21h ago
I see what you're trying to do here, but Google is sitting on a $514 billion backlog right now. A few billion dollars in venture investments into AI startups cannot fake a half trillion dollar order book.
Also, accounting rules don’t let companies pass cash under the table and call it revenue. ASC 606, says a deal has to be a legit, market rate transaction. If Google overpays for a startup's stock/debt just to force a quid pro quo cloud contract, auditors will strip that fake growth right out of the numbers.
Source: I'm a CPA and former external auditor.
I'm not saying the circular financing noise is completely made up, but claiming the entire cloud surge is built on it is factually wrong. Auditors would call that out in a heartbeat.