Amid persistent criticism that US Big Tech's investments in artificial intelligence (AI) are excessive relative to their profitability, concerns have now been raised regarding an "earnings illusion." Reports indicate that beyond the money earned from actual business operations, Big Tech companies saw valuation gains exceeding $160 billion (approx. 220 trillion won) in the second quarter alone from the rising value of equity stakes in other AI firms.

The Financial Times (FT) reported on the 31st that Alphabet, Amazon, Nvidia, and Microsoft saw their pre-tax profits surge in recent earnings reports, largely boosted by valuation gains on equity stakes held in other AI companies. These equity valuation gains are accounted for under "other income" in financial statements.

Alphabet's other income more than doubled from the previous quarter to reach $97.9 billion (approx. 135 trillion won) for the three months ending in June.

Amazon's other income also surged more than threefold over the same period, reaching $53.4 billion (approx. 74 trillion won).

In particular, equity valuation gains for Big Tech surged this year following the IPO of Elon Musk's space company, SpaceX. Alphabet, Google's parent company, and Nvidia hold stakes in SpaceX. SpaceX absorbed Musk's AI company, xAI, prior to its public offering, and its corporate value soared following the listing, driving up the value of shares held by early investors.

As of the end of June, Nvidia held approximately 123 million shares of SpaceX. For the three-month period ending in July, Nvidia recorded $7.7 billion (approx. 11 trillion won) in other income.

Critics point out that these equity valuation gains have made it difficult to gauge the true profitability of Big Tech companies. For Alphabet and Amazon, the primary driver behind their recent pre-tax profit growth was not new business ventures or cash generation, but the surging value of stakes invested in companies like SpaceX and Anthropic.

Ben Snyder, US equity chief strategist at Goldman Sachs, noted regarding the profit growth driven by AI investments, "Questions are being raised as to whether the growth reported by companies is based on actual demand, or if it is distorting the reality in some way."

In particular, the value of unlisted equity stakes is reassessed every time those companies raise new capital. As OpenAI and Anthropic eventually go public, the phenomenon where equity valuation gains heavily impact Big Tech earnings is expected to repeat.

Some also point out that the massive one-off valuation gains recorded this year could actually act as a drag on earnings growth rates next year.

Scott Chronert, US equity strategist at Citi, stated, "The fact that earnings were boosted by equity valuation gains means there is also a possibility that earnings growth rates could turn negative next year."