The AI boom has sent tech stocks soaring to historic highs, with many trading at punchy valuations. According to Michael Burley, they’re even more expensive than they look.
The investor of “The Big Short” fame explained why he thinks so in a detailed post on Substack this week, which he said was the culmination of weeks spent reviewing more than 1,000 annual reports from Nasdaq 100 companies dating back 10 years.
Berry’s central argument is that companies and the Wall Street analysts who cover them don’t properly account for the full amount of stock compensation.
He argues that it should include funds spent to offset the dilution caused by stock buybacks, as well as net taxes associated with stock vesting.
Burley said he calculated that based on generally accepted accounting principles (GAAP), Nasdaq 100 earnings are overstated by nearly 20% because SBC costs are not fully factored in.
In other words, if an index trades at 25x GAAP price/earnings, the effective multiple is closer to 30x, he wrote.
Berry also claimed that Wall Street’s projected earnings estimates were 42% higher than the actual owner earnings, properly adjusted for SBC costs.
“For every dollar of earnings per share recognized by GAAP, shareholders receive only 83.49 cents,” he wrote.
“The fickle 16.51 cents is waving wildly at GAAP and thumbing its nose at shareholders on its way to employees’ pockets.”
Burley wrote that he calculated that the 97 major constituents of the Nasdaq 100 reported cumulative GAAP net income of $4.9 trillion over the 10-year period ending in fiscal year 2025.
Wall Street analysts expected the figure to be $5.8 trillion, including SBC. Meanwhile, Berry’s analysis puts the “true owner’s profit” at $4.1 trillion.
He wrote that the $1.7 trillion difference was an “illusion of profits” that reflected “the difference between how much corporate profits shareholders actually owned and what Wall Street and the media reported.”
He added: “Over the past decade, Wall Street has steered investors into profits that are 42% higher than what actually existed before.”
“Serious problem”
Barry cited Meta as an example, saying the company had not properly accounted for SBC costs in its financial statements, overstating the owner’s profits by about 20%.
Meta may appear to be trading at 19 times forward earnings, but once SBC costs are factored in, it’s actually trading at 24 times earnings, he wrote. If shareholders only receive about 83% of GAAP income, they are paying a multiple of 28, he added.
Meta did not respond to Business Insider’s request for comment.
“To put this in perspective, if Wall Street earnings expectations are the basis for most discussions about index P/E ratios, those discussions are completely, completely, woefully misguided,” Barry wrote.
He criticized companies for treating SBCs as “free compensation to keep employees happy” and said this was a “serious problem” that could harm long-term interests for shareholders.
The investor known for shorting the mid-2000s housing bubble and issuing cryptic warnings has once again singled out Tesla.
Barry said that because the use of SBC by EV manufacturers is so significant, excluding SBC from the analysis reduces the GAAP total overstatement from approximately 20% to 12.5%.
Berry also mentioned 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 dead weight,” he wrote.
Tesla did not respond to Business Insider’s request for comment.
Burry also mentioned companies such as Datadog, Workday, Axon, Shopify, Palantir, Marvell, CrowdStrike, and Zscaler.
“From an owner’s bottom line perspective, it’s a cesspool of shareholder neglect,” Barry wrote.