Michael Burry Calls Out $176B in Possibly Fake AI Profits
The AI boom runs on chips that burn out in a couple of years. Stretch their life on paper from two to five years, and you conjure billions in extra profits, $176 billion, by Michael Burry's estimate.
Michael Burry became a legend via the book and movie, The Big Short. He was the quiet loner with a glass eye. The investment bankers laughed at him because he asked to keep their coffee mugs. But Burry had the last laugh, making $100 million for himself and $700 million for his investors, by betting against those same bankers. (Check out this clip from the movie.)
After being silent for years, Burry has begun attacking the AI trade. This week, he claimed AI companies are misusing depreciation to fatten their profits:
Understating depreciation by extending useful life of assets artificially boosts earnings -one of the more common frauds of the modern era. Yet this is exactly what all the hyperscalers have done. By my estimates they will understate depreciation by $176 billion 2026-2028. By 2028, ORCL will overstate earnings 26.9%, META by 20.8%, etc. But it gets worse.
— Michael Burry
In the quote above, Burry's argument is that AI chips and servers cost a fortune but only last for about two years. An ethical company would thus write off (depreciate) the cost of buying that hardware over those same two years.
Burry accuses companies like Alphabet, Meta, Oracle, Microsoft, and Amazon of cooking the books. They are pretending that their two-year chips will last for five years, he says. That lets them take a significantly smaller hit to their profits each year as they depreciate them. (You can see his chart below.)
Why would they do that? Because bigger profits push stock prices higher.
Michael Burry's Depreciation Chart
How Depreciation Works: A Primer
Oh, and if you're still confused about what depreciation is, here's a quick explanation:
Depreciation spreads the cost of hardware over the years it actually works. If a $1 billion server farm lasts two years, the company removes $500 million from its asset value each year and records that as an expense. Stretch the life to five years and the expense drops to $200 million a year, making profits look better even though the machines won't actually last longer.
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