Under the "Iron Chain," this indicator of tech giants is very important

Author: Bao Yilong

In the current wave of AI infrastructure investment, Remaining Performance Obligations (RPO) are becoming a key metric for measuring future revenue, but this seemingly impressive figure hides many uncertainties.

On October 21, Morgan Stanley's research report pointed out that in the current AI investment frenzy, tech giants are signing long-term, large contracts on an unprecedented scale, forming an interdependent, capital-circulating "iron chain" ecosystem.

Morgan Stanley analyzed that merely focusing on revenue growth and capital expenditure is no longer sufficient. A crucial forward-looking indicator—Remaining Performance Obligations (RPO)—is becoming key to understanding these giants' future real revenue, growth quality, and potential risks.

RPO, the "Ballast" of the AI Boom

According to accounting standards, RPO (Remaining Performance Obligations) refers to the portion of legally binding and irrevocable contracts that a company has signed, which are yet to be fulfilled and recognized as revenue. It excludes optional renewals or contracts with no significant punitive termination clauses.

The importance of RPO lies in its provision of a valuable window into future revenue trends. A growing RPO balance typically indicates strong new orders and solid customer relationships. Conversely, a decline may be an early signal of slowing sales momentum or shorter contract durations.

In the AI ecosystem, several key companies have seen explosive growth in their RPO balances. Data shows that over the past six quarters:

• Microsoft's RPO grew by 55%.
• Coreweave's RPO grew by 218%.
• Oracle's RPO astonishingly grew by 411%.

Notably, Oracle disclosed during its recent Investor Day that the company gained approximately $65 billion in incremental RPO from 7 contracts with 4 customers, pushing its total RPO over the $500 billion mark. In contrast, Google's and Amazon's RPO scales are much smaller.

(RPO service balance situation of major hyperscale cloud service providers)

Not All RPOs Are Created Equal

The research report pointed out that although RPO provides visibility into future revenue, investors must analyze its composition in depth, as the quality of RPO varies significantly among different companies.

First, there is a significant difference in contract durations. The massive RPOs of Oracle and Coreweave mainly come from long-term contracts spanning several years. In contrast, the agreement durations of Microsoft, Amazon, and Google are relatively short, with revenue recognition occurring closer to the time of contract signing Through the ratio of "RPO/Revenue over the past 12 months," it can be seen that Coreweave and Oracle have ratios of 14.4 times and 8.5 times respectively, while Microsoft is only 1.3 times, and Amazon and Google are about 0.3 times.

(RPO/Revenue over the past 12 months, Coreweave reaches 14.4 times)

A high ratio indicates that these companies have locked in demand for the coming years in their current RPO. This may lead to a slowdown in the growth of new contracts, even if future potential business activity remains stable.

More importantly, long-term contracts face a higher risk of renegotiation. If future customer demand or pricing dynamics change, companies may be forced to make concessions in pricing, terms, or service volume to maintain customer relationships.

As Coreweave disclosed in its risk factors, if customers are no longer willing to sign long-term contracts under the "take-or-pay" model in the future, it will negatively impact its cash flow forecasts, profit margins, and business outlook.

Re-examining Valuation and Risks: The Truth Revealed by RPO

Comparing RPO with the company's market value can more clearly reveal its impact on valuation.

Data shows that including the latest announced contracts, RPO accounts for 81% and 60% of the market value of Coreweave and Oracle respectively. In contrast, this ratio is only 9% for Microsoft, and even lower for Amazon and Google.

(RPO accounts for 81% and 60% of the market value of Coreweave and Oracle respectively)

This huge gap indicates that investors attribute most of the value of Coreweave and Oracle to these contracted future revenues. For Microsoft, Amazon, and Google, their valuations reflect broader growth opportunities that have not yet been contracted within their vast ecosystems.

Additionally, there are two major uncertainties:

• Profit and execution risk: For companies like Coreweave and Oracle that drive RPO growth through emerging businesses, the costs required to fulfill these large-scale contracts (including infrastructure, personnel, and maintenance capital expenditures) are highly uncertain. This directly affects the ultimate return rate of these contract revenues.
• Customer concentration risk: The relationships among participants within the AI ecosystem are increasingly intertwined, forming a "chain of iron links," where the roles of customers and suppliers overlap

(Capital flow situation among AI ecosystems)

An Exception: Nvidia's "Alternative" Model

In stark contrast to the soaring RPO of the aforementioned companies, Nvidia's RPO balance has remained at a low average of $1.8 billion over the past year, despite the company announcing multiple AI-related collaborations.

The research report indicates that this reflects Nvidia's unique "optional procurement" business model, rather than long-term locked commitments. There are no contractual obligations for either party before the order is submitted.

This point has also been confirmed by Nvidia's management, who stated that investors should not be overly fixated on the "10GW target" mentioned in their agreement with OpenAI, as the actual figures may vary significantly.

This model provides Nvidia with flexibility, but it also means that its future revenue visibility cannot be reflected through the RPO metric.

In summary, for investors focused on the AI sector, RPO is a powerful tool for measuring future growth certainty. However, it is essential to look beyond the surface of the numbers and carefully examine the underlying contract terms, profit margins, execution risks, and customer structure.

Risk Warning and Disclaimer

The market carries risks, and investment should be approached with caution. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances. Investment based on this is at one's own risk