'Big Short' investor Michael Burry lays out why he thinks high-flying tech stocks are even pricier than you think

• Michael Burry of "The Big Short" says tech stocks are even more richly valued than they seem.
• The investor pointed the finger at stock-based compensation in a lengthy Substack analysis.
• He argued that Wall Street's forward earnings estimates for the Nasdaq 100 are 42% overstated.

The AI boom has catapulted tech stocks to historic highs, with many trading at punchy valuations. They're even more expensive than they appear, Michael Burry says.

The investor of "The Big Short" fame explained why he thinks this in a detailed Substack post this week, which he said was the product of weeks spent reviewing more than 1,000 annual reports from Nasdaq 100 companies going back a decade.

Burry's central claim is that companies, and the Wall Street analysts who cover them, don't properly account for the full costs of stock-based compensation.

He says they should include the money spent buying back shares to offset the dilution they cause, and the net taxes related to the shares vesting.

Burry said he calculated that under generally accepted accounting principles (GAAP), Nasdaq 100 earnings are overstated by nearly 20% because SBC costs aren't fully factored in.

That means if the index is trading at a GAAP price-to-earnings ratio of 25, the real multiple is closer to 30, he wrote.

Burry also argued that Wall Street's forward earnings estimates are 42% higher than actual owners' earnings that have been properly adjusted for SBC costs.

"Of every dollar of earnings per share that GAAP blesses, shareholders see only 83.49 cents of that dollar," he wrote.

"The wayward 16.51 cents wave crudely at GAAP and thumb their noses at shareholders on their way to employees' pockets."

Burry wrote that he calculated that the 97 primary constituents of the Nasdaq 100 reported $4.9 trillion in cumulative GAAP net income over the decade ending in fiscal 2025.

Wall Street analysts, in part by adding back SBC, pegged that figure at $5.8 trillion. Meanwhile, Burry's analysis put "true owners' earnings" at $4.1 trillion.

The $1.7 trillion gap is an "earnings illusion," he wrote, as it reflects the "difference between what shareholders really owned of corporate earnings and what Wall Street and media reported."

"Wall Street over the last 10 years guided investors to 42% more earnings than ever actually existed," he added.

'Serious issue'

Burry gave Meta as an example, saying it had overstated owners' earnings by about 20% by not properly accounting for SBC costs in its financials.

While Meta might appear to trade at 19 times forward earnings, its real forward price-to-earnings multiple is 24 once SBC costs are factored in, he wrote. If shareholders only receive about 83% of GAAP income, then they're paying a multiple of 28, he added.

Meta did not respond to a request for comment from Business Insider.

"Putting this in perspective, if Wall Street earnings estimates are the basis for most discussion of index P/E ratios, those discussions are entirely, wholly, woefully misguided," Burry wrote.

He criticized companies for treating SBC as "free compensation they use to keep employees happy," saying it's a "serious issue" that can eat into shareholders' long-term returns.

The investor, known for shorting the mid-2000s housing bubble and issuing cryptic warnings, singled out Tesla once again.

Burry said that the EV maker's use of SBC is so significant that removing it from his analysis reduces the aggregate GAAP overstatement from about 20% to 12.5%, he wrote.

Burry also called out Tesla's $1 trillion pay package for CEO Elon Musk. "Such a beastly mass would dwarf everything in my data set, even Tesla's own epic deadweight," he wrote.

Tesla did not respond to a request for comment from Business Insider.

Burry also mentioned companies like Datadog, Workday, Axon, Shopify, Palantir, Marvell, CrowdStrike, and Zscaler.

"From an owners' earnings' perspective, a cesspool of shareholder disregard," Burry wrote.