Burry criticizes companies for being generous to employees. Tesla and Palantir are under his attack
Investor warns that companies giving away their own shares to employees directly harms shareholders
Prominent investor Michael Burry, in a new post on his paid blog Cassandra Unchained, criticized a common corporate practice of compensating a portion of employee expenses with shares of the employing companies' stock rather than direct cash payments.
He says that the fact that companies do not count such premiums as direct costs misleads investors about the real financial position of issuers. He quotes a fragment of one of Warren Buffett's letters to Berkshire Hathaway shareholders:
"Company executives sometimes argue that stock-based compensation should not be recognized as an expense. (What else would it be - a gift from shareholders?)"
Burry argues that standard company valuation models understate the real cost of labor compensation, which, thanks to equity partial compensation schemes, is much higher than what companies report under current financial reporting standards.
If we simultaneously take into account the constant "dilution" of current shareholders' stakes by such personnel incentive programs and share buybacks from the market, which should compensate for them, the picture of the fundamental value of securities of even the largest issuers starts to look much more modest.
As a model case, Burry looks at Nvidia and argues that since 2018, the cumulative cash equivalent of its employee stock ownership program and related tax payments has reached approximately $112.5 billion, and despite the buybacks, the total number of Nvidia shares outstanding has barely decreased. That is, the whole process has been a trivial redistribution of the company's earnings from its owners (i.e., shareholders) to its employees, the investor argues.
Burry even mentions the results of an anonymous survey of 3,000 Nvidia employees, which showed that up to 80% of them are millionaires, and the fortunes of nearly half of the respondents exceed $25 million.
What exactly is Burry claiming?
He proposes an amendment to the classic formula for discounting future cash flows: in addition to the discount rate and growth rate, a constant rate of dilution of the share of shareholders should be added to the denominator. According to Burry's calculations, it turns out that even 1% of the annual issue in favor of employees, all other things being equal, reduces the value of multipliers for the fair valuation of the company. The text also provides a purely practical conclusion: if the buyback is "eaten up" by the new issue, the economic effect for the owners of the shares is equivalent to a direct deduction from the "owner's profit," regardless of how it looks in GAAP reporting or other Wall Street metrics.
Burry's allegations are not limited to Nvidia. In the text, he mentions similar practices at Tesla, Palantir, and Amazon. The logic there is the same: even 1-2% "dilution" of share capital through corporate bonuses annually reduces the minority share in the future financial flows of companies.
Burry emphasizes the paradox - the higher the share price rises, the more it costs the company to keep the dilution rate flat. This kills the long-term value of growth.
Burry's separate and more strident attack is directed at Tesla. He claims that Tesla is diluting its shareholders' stakes by about 3.6% per year while not conducting buybacks at all, meaning shareholder value is being destroyed on an ongoing basis. With the recent news of Elon Musk's potential trillion-dollar pay package, Burry believes this dilution will only get worse, making the company's current market capitalization "ridiculously overvalued." He ironically adds that Tesla first bet on electric cars (until competition emerged), then on autonomous driving (until competition emerged), and now on robots - "until competition emerges."
Palantir is another example: according to Burry, the company has been diluting shareholder interest by about 4.6% a year despite share buybacks.
Palantir has the remarkable distinction of being the first company to have a billionaire to revenue ratio greater than one. The company has five billionaires who got rich through stocks - and annual revenues of less than $4 billion
What was Nvidia's response?
In his post, Burry also cites Nvidia's response to these allegations. The company insists that it has spent about $91 billion since 2018 to buy back its own shares, and that including taxes in that amount, as Burry does, is incorrect. The response also says that employee compensation is comparable in scope to the practice of similar programs at other large tech companies. Burry's response is tough: the "everybody does it" argument doesn't turn a loss into a profit, and he calls the attempt to separate buybacks and employee incentives "hypocrisy" because the two processes are inextricably linked - one exists only to cover the other.
This article was AI-translated and verified by a human editor
