When Sundar Pichai walked into Alphabet's Q1 2026 earnings call on April 29, the headline number was a record. Profit of $62.6 billion, up 81 percent year over year. Cloud revenue up 63 percent. Margins on cloud expanded from 9.4 to 32.9 percent.

Almost none of the press coverage that night mentioned the line buried in the financial supplement. About $28.7 billion of that record profit, nearly half, did not come from search ads, YouTube, Cloud, Waymo, or any product Alphabet sells. It came from Alphabet writing up the value of its stake in Anthropic, a private company whose price Alphabet itself helps to set.

Two days earlier, on April 27, Alphabet had committed to invest up to another $40 billion in Anthropic, much of it in compute. According to Fortune, the $36.9 billion total equity gain Alphabet booked across all its private investments last quarter is more than triple the prior peak.

Amazon's filing tells the same story in different language. The Q1 2026 release notes that net income "includes pre-tax gains of $16.8 billion included in non-operating income from our investments in Anthropic." That single mark-up was larger than half of Amazon's entire pre-tax profit for the quarter. The $8 billion Amazon has put into Anthropic since 2023 is now carried at more than $70 billion on the balance sheet.

Add Alphabet's Anthropic-driven gain to Amazon's, and you get roughly $45 billion of Q1 profit at two of the largest companies in the world that came from one private startup neither company can actually sell shares of, on a public market that does not yet exist.

The Numbers

Anthropic closed its Series G round on February 12, 2026, at a $380 billion post-money valuation, bringing in $30 billion of new capital led by GIC and Coatue. That round is the official accounting trigger. Both Alphabet and Amazon are required by GAAP to mark equity investments to fair value, and a fresh primary round at a higher price is the cleanest possible benchmark.

Amazon disclosed in its Q1 release that its Anthropic mark-up was triggered by the Series G and by the conversion of some of its convertible notes into preferred stock. Translation: Amazon swapped a debt-like instrument for equity priced at the round, and recognized the difference as a gain.

Alphabet does not break out its Anthropic stake separately, but Sacra and TechCrunch peg it at roughly 14 percent of the company. At a $380 billion valuation, that is about $53 billion of carrying value before this quarter's adjustment. The $28.7 billion gain implies Alphabet's prior basis was somewhere in the mid-$20 billion range.

For context on what these companies actually paid out in cash last quarter:

  • Alphabet capex Q1 2026: approximately $25 billion
  • Amazon capex Q1 2026: approximately $32 billion
  • Microsoft capex fiscal Q3 2026: approximately $30 billion
  • Meta capex Q1 2026: approximately $24 billion

That is $130.65 billion of cash leaving the four biggest hyperscalers in a single quarter to build AI infrastructure, more than three times the inflation-adjusted cost of the entire Manhattan Project, as Fortune pointed out. Capex guidance for full-year 2026 from this group now totals around $650 billion, and CNBC reported on April 30 that analysts at Morgan Stanley and Bernstein now expect the combined number to top $1 trillion in 2027.

Against that, Anthropic itself has roughly $30 billion of annualized revenue, growing fast but still unprofitable, and the company's own banker conversations in late April center on a potential $50 billion primary round at a valuation north of $900 billion. That would push the next mark-up at Alphabet and Amazon into another double-digit-billion gain on paper, again without a single share changing hands.

Pressure Points

The Loop

The mechanic is what regulators in older industries used to call a roundtrip. Alphabet and Amazon sign multi-year compute commitments with Anthropic, denominated in tens of billions. Anthropic uses that compute and that capital to grow revenue, which justifies a higher valuation in its next funding round. Alphabet and Amazon then write up the carrying value of their Anthropic stakes by tens of billions, and book the change as profit.

"It's interesting that they're able to control or influence the value of one of their own assets," a tax consultant told Fortune, "and one that they're able to mark to market by engaging in business transactions with that entity."

The FTC flagged a softer version of this concern in its January 2025 report on cloud-AI partnerships, mapping how Microsoft and OpenAI, Amazon and Anthropic, and Google and Anthropic combine equity stakes with cloud commitments and revenue-sharing arrangements. The pattern has gotten more aggressive since.

The April 24 announcement that Google would invest up to $40 billion more in Anthropic, much of it as cloud credits on Google Cloud, makes the loop explicit. Google records the credits as future cloud revenue. Anthropic uses them to train models. The bigger Anthropic gets, the higher the next markup at Alphabet. None of the cash actually leaves the system in the way it would if Google had spent that $40 billion on Nvidia GPUs and depreciated them.

Revenue Recognition

OpenAI alleged in mid-April that Anthropic uses accounting treatment that inflates reported revenue, specifically by grossing up its revenue share with Amazon and Google. Anthropic responded that it recognizes gross revenue because it is the principal in those transactions, with the cloud partners acting as distribution channels, and that the treatment is consistent with GAAP.

The dispute matters because Anthropic's $30 billion ARR figure is the foundation of the $900 billion valuation that justifies the $45 billion of profit Alphabet and Amazon just booked. If Anthropic's gross revenue should have been booked net, the multiple compresses. If the multiple compresses, the carrying value compresses. If the carrying value compresses, Alphabet and Amazon will eventually book a writedown that travels in reverse through their income statements.

This is exactly the kind of question the SEC tends to examine when private-company stakes become material to a public company's reported earnings. Both Alphabet and Amazon disclose the Anthropic gain separately in non-operating income, which is best practice, but the size of these adjustments relative to operating profit puts them on the radar in a way they were not last year.

Cash Versus Paper

The starkest tension on the Q1 numbers is the asymmetry between what is going out and what is coming in. Alphabet and Amazon together spent $57 billion of real cash on capex in Q1 and booked roughly $45 billion in non-cash gains on Anthropic. The cash going out funds GPUs, power, and concrete that depreciate over five to seven years. The paper gains coming in depend on a single private company maintaining a valuation that has tripled in 14 months.

Free cash flow, which strips out the markups, tells a different story. Alphabet's free cash flow grew far less than headline net income last quarter. Amazon's free cash flow swung negative on a trailing basis as capex outpaced operating cash. The Anthropic gain papers over that compression in net income, which is the number the index funds and the algos read first.

What Happens Next

Three scenarios over the next four quarters.

The most likely path is that Anthropic closes its rumored $50 billion round at a $900 billion valuation in May or June. Both Alphabet and Amazon would book another mark-up in Q2, probably $15 to $25 billion combined. The narrative on AI profits remains intact through Q3 earnings, and the question of whether any of it is real gets pushed to 2027.

The bull scenario is that Anthropic actually files for an IPO in late 2026 or early 2027 at a valuation in the $1 trillion range. The marks become realizable. Alphabet and Amazon convert paper gains into either liquid stock or, more likely, hold and harvest in subsequent rounds. In this world the Anthropic stake becomes one of the great venture investments of all time and the accounting questions fade.

The bear scenario is the ugly one. Either Anthropic's growth decelerates faster than expected, or DeepSeek, Mistral, and the next wave of open-weight competitors continue compressing frontier-model pricing, or Anthropic does a flat or down round. Any of those triggers a writedown in the same income statement line that just delivered the headline profit. The reverse mechanic would be far more visible than the markup, because investors who paid no attention to the inputs of the gain pay close attention to the outputs of a loss.

A fourth possibility, which sits outside these three, is regulatory. If the SEC formalizes guidance on related-party valuations between cloud providers and the AI labs they fund and host, the discount applied to private-company marks could widen. That would not require any change in Anthropic's actual prospects to force a writedown.

What To Watch

Five specific signals over the next two quarters.

First, the Anthropic Series H. Whether the round closes at $900 billion, lower, or gets pulled. The board decision is expected in May, per TechCrunch sources. A pulled round, even for benign reasons, would be the first crack in the markup machine.

Second, the language Amazon and Alphabet use in 10-Q filings. Watch for expanded disclosure of the inputs to fair value, sensitivity tables, or any mention of related-party transactions. The 10-Q for Q1 lands in the next two weeks.

Third, OpenAI's revenue numbers. The Wall Street Journal reported on April 28 that OpenAI missed its WAU and revenue targets in Q1. If OpenAI continues to underperform, Anthropic looks like the only game in town, which supports the markup. If OpenAI snaps back with GPT-5.5 traction, the case for Anthropic at $900 billion gets harder.

Fourth, free cash flow trajectory at Alphabet and Amazon. If FCF growth lags net income growth by a widening margin in Q2, analysts will start excluding Anthropic gains in their adjusted models. That is the moment the paper-versus-cash gap stops being invisible.

Fifth, any movement from the SEC, FTC, or international competition authorities on AI-cloud equity arrangements. The European Commission has signaled interest. UK CMA already opened a partnership review in late 2024. A formal investigation in any major jurisdiction would force disclosure that does not currently exist.

My Opinion

The Anthropic stake is a real asset. Anthropic is a real business with real revenue and a credible path to a public listing. None of this is fraud, and none of it violates GAAP under any reasonable reading. The cloud-equity loop is what an industry building the next general-purpose technology probably looks like in its capital-intensive phase, and it has historical precedent in railroads, oil pipelines, and the early internet.

What is true at the same time is that two of the largest public companies in the world reported Q1 profits where almost half the year-over-year improvement came from writing up the value of a private company they fund, host, and have commercial agreements with. That is a structural feature of the AI economy that nobody owned at the start of 2024, and now it is the difference between Alphabet beating estimates by 30 percent and beating them by 5 percent.

The right way to read these earnings is to mentally separate them. Operating businesses at Alphabet and Amazon are still strong, but they grew at roughly the rate the businesses below them grew. Investing businesses, which is what the Anthropic stakes effectively are, did the rest. When the reverse trade hits, and at some point it will, the surprise will be larger than the surprise on the way up, because almost no one in the sell-side coverage is modeling the marks as a separable line.

The most useful question to ask between now and Q2 earnings is not whether AI works. It is what these companies' net income would have looked like in Q1 if Anthropic had simply held its $380 billion valuation flat. The answer at Alphabet is roughly a 35 percent year-over-year profit gain instead of 81 percent. At Amazon it is profit roughly half of what was reported. Those are still good numbers. They are not blowout numbers. And the gap between the two is the part of the AI story that will eventually be settled in cash.