Investor Michael Burry, known for his accurate prediction of the 2008 financial crisis, has made serious allegations against major technology companies. Burry claims that leading cloud and artificial intelligence infrastructure providers, often called 'hyperscalers,' are inflating their profits by manipulating depreciation expenses. He suggests these firms are extending the estimated lifespan of their computing equipment, including expensive AI chips, beyond what is realistic.
This accounting practice, if proven, could significantly overstate earnings for some of the biggest names in the tech sector, particularly those heavily invested in the artificial intelligence boom. Burry, who leads Scion Asset Management, first shared his concerns on social media, drawing immediate attention from market observers.
Key Takeaways
- Michael Burry alleges major tech companies manipulate depreciation to boost profits.
- He claims 'hyperscalers' extend the useful life of AI chips and servers unrealistically.
- Burry estimates a potential $176 billion understatement in depreciation from 2026-2028.
- Oracle and Meta Platforms are specifically mentioned, with profits potentially overstated by 27% and 21% respectively by 2028.
- The investor has previously warned that current AI enthusiasm resembles the dot-com bubble.
The Core of Burry's Accusation: Depreciation Manipulation
Burry's central argument focuses on how companies account for their large capital expenditures, specifically high-cost components like Nvidia chips and advanced servers. Under Generally Accepted Accounting Principles (GAAP), companies can spread the cost of an asset over its estimated useful life as a yearly depreciation expense. By estimating a longer lifespan for these assets, companies can report lower annual depreciation costs, which directly increases their reported net income and, consequently, their profits.
The investor contends that the rapid pace of technological advancement in the AI sector means chips and servers have a much shorter practical lifespan than what these companies are reporting. He argues that components with a 2-3 year product cycle should not have their useful lives extended in accounting records. This practice, Burry states, artificially boosts earnings and is a 'common fraud of the modern era.'
Financial Impact Estimate
Michael Burry estimates that between 2026 and 2028, this alleged accounting maneuver could lead to an understatement of depreciation by approximately $176 billion across the industry. This would significantly inflate reported earnings for the involved companies.
Companies Under Scrutiny: Oracle and Meta Platforms
While Burry's accusations target 'hyperscalers' broadly, he specifically named Oracle and Meta Platforms. He suggested that by 2028, Oracle's profits could be overstated by roughly 27%, and Meta Platforms' profits by about 21%, due to these accounting practices. These are substantial figures that, if accurate, would paint a very different picture of these companies' financial health.
When contacted for comment, Oracle and Meta Platforms have not yet responded. Nvidia, a key supplier of the chips in question, declined to comment on the allegations. Proving such claims can be challenging due to the inherent flexibility companies have in estimating asset depreciation.
"Understating depreciation by extending useful life of assets artificially boosts earnings - one of the more common frauds of the modern era."
Burry's History of Market Warnings and Bets
Michael Burry gained widespread recognition for his prescient bet against subprime mortgages before the 2008 financial crisis, a story famously depicted in 'The Big Short.' His latest allegations come amidst a series of recent market moves and warnings. Earlier this year, Burry expressed concerns that the intense enthusiasm surrounding artificial intelligence mirrors the late-1990s tech bubble, which famously burst.
Just last week, regulatory filings revealed that Burry's firm held significant put options against two prominent AI-related companies: Nvidia and Palantir Technologies. These put options represented a notional value of approximately $187 million against Nvidia and $912 million against Palantir as of September 30. The specific strike prices and expiration dates of these contracts were not disclosed.
The Role of Depreciation in Accounting
Depreciation is an accounting method used to allocate the cost of a tangible asset over its useful life. It allows companies to expense a portion of the asset's cost each year, rather than expensing the entire cost in the year of purchase. This impacts a company's reported profit and tax obligations. The estimated 'useful life' is a key variable, and extending this period reduces annual depreciation expense, thereby increasing reported profits.
Market Reaction and Future Disclosures
Burry's recent disclosures and accusations have already sparked reactions in the market. Following the news of his wagers against them, Palantir CEO Alex Karp publicly dismissed Burry's bets as "super weird" and "bats--- crazy." After initial drops, shares of Nvidia rebounded nearly 6% on Monday, following a 7% decline the previous week. Palantir also saw its shares jump almost 9% on Monday after an 11% sell-off last week. Nvidia, however, saw a slight downturn again on Tuesday.
Burry indicated that more details regarding his allegations would be released on November 25, urging observers to "stay tuned." The financial world will be watching closely to see what further evidence or analysis he presents to support his claims against these technology giants.
The investor's history of identifying market vulnerabilities gives his warnings significant weight, even if the current allegations prove difficult to substantiate definitively. The debate over accounting practices in the rapidly evolving AI sector is likely to intensify as more information becomes available.