Michael Burry, the investor famous for predicting the 2008 housing crash, has issued a stark warning on technology stock valuations. In a detailed Substack analysis, he contends that the sector's prices are even more expensive than they seem. His critique centers on how companies account for stock-based compensation.
Burry argues that current earnings calculations fail to properly include the full costs of this compensation. He specifically points to the money spent on share buybacks to offset dilution and the net taxes related to shares vesting. The investor says this accounting practice paints an overly rosy picture of corporate health.
According to his analysis, which he says involved reviewing over 1,000 annual reports from Nasdaq 100 companies, earnings under generally accepted accounting principles are overstated by nearly 20%. He further claims that Wall Street's forward earnings estimates for the index are 42% too high. This suggests a much steeper valuation premium for the high-flying tech sector.
The warning comes as an AI-fueled rally has pushed many technology stocks to historic highs. Burry's analysis implies that investor enthusiasm may be overlooking significant financial engineering. If his calculations are correct, it could signal deeper vulnerability for the market's most popular names.
His bearish view runs counter to the prevailing market optimism that has driven indices upward. It presents a fundamental challenge to how growth and profitability are measured in the modern economy.