Alphabet and Amazon reported blockbuster profit increases in Q1 2026—81% and 77% respectively—but here's the uncomfortable truth: roughly half came not from selling ads, cloud services, or any actual products. The gains came from mark-to-market accounting on their Anthropic stakes.
Let's cut through the corporate spin. Alphabet posted a record $62.6 billion profit for the quarter, with approximately $28.7 billion—nearly half—generated by the appreciated value of its Anthropic investment. The company didn't earn that money. It didn't receive a dividend or cash distribution. The number exists purely because Anthropic completed funding rounds at higher valuations, forcing Alphabet to mark up its stake.
Amazon's disclosure was even more striking. The company reported $16.8 billion in non-operating income from its Anthropic investments, representing more than half of pre-tax income for the quarter. Amazon's $8 billion investment is now valued at over $70 billion on paper—a staggering 775% return without Anthropic paying Amazon a single dollar.
How does this accounting gymnastics work? When a private company like Anthropic raises capital at a higher valuation, public companies holding equity stakes must adjust their books to reflect the new price. That creates a reportable profit, even though no cash changes hands and the gain remains unrealized until an actual exit.
Here's where it gets problematic. As tax consultant Robert Willens noted, "It's interesting that they're able to control or influence the value of one of their own assets." Think about that. Google and Amazon invest billions in Anthropic. Then they commit additional billions to provide cloud capacity and services. Each capital injection and commercial deal inflates Anthropic's valuation. Their existing stakes appreciate accordingly. Voila—reportable profits.
It's a self-reinforcing loop that questions the fundamentals of the AI boom. Are we witnessing genuine value creation, or elaborate financial engineering? When half your quarterly profits come from marking up an investment you effectively control, that's worth scrutinizing.
Willens highlighted that accounting regulators faced skepticism when requiring these mark-to-market rules in 2018, with critics predicting unnecessary earnings volatility. Current results prove those concerns were prescient. Alphabet's $36.9 billion equity gain exceeded prior peaks by threefold—swings that have nothing to do with how many search ads got clicked or cloud instances got rented.
For investors trying to value these companies, this creates serious problems. How do you model earnings when half comes from unrealized, potentially reversible gains on private investments? What happens when market sentiment shifts and those marks reverse? The 2022 tech correction offers a preview—private valuations collapsed, forcing painful write-downs.
The broader implication is more troubling. If tech giants are reporting AI profits primarily through accounting adjustments rather than operational cash flows, it suggests the business models haven't matured yet. Real profits come from customers paying more than it costs to serve them. Paper profits come from spreadsheets.
None of this means Anthropic isn't valuable or that AI won't transform business. But when Fortune reports that half your "blowout AI profits" came from a stake revaluation rather than actual business performance, investors should pay attention. The numbers don't lie, even when the story companies tell around them does.
