'Downgrade Game' investor accused Big Tech of artificially inflating profits

Famous investor Michael Burry, the prototypical hero of the book and movie "The Downgrade Game," suspected hyperscalers, including Meta and Oracle, of artificially inflating profits by "leveraging" their assets.

"Understating depreciation by extending the life of assets artificially boosts profits - it's one of the most common tricks of modern times," Michael Burry, famous for predicting the 2008 mortgage crisis, wrote on social media X.

He reminded that hyperscalers are actively increasing capital expenditures by purchasing Nvidia chips and servers, which usually have a lifespan of only two to three years. Extending it "on paper," according to the financier, allows companies to stretch amortization costs over a longer period. This lowers reported costs and therefore artificially increases net income, SeekingAlpha explains. Burry estimates that such adjustments would understate depreciation by a cumulative $176 billion between 2026 and 2028.

He estimated that by 2028, Oracle and Meta could overstate their earnings by 26.9% and 20.8%, respectively.

Burry also showed how companies gradually increased the "useful life" of their assets starting in 2020. For example, by 2025, Meta's networking equipment has increased its useful life from three to five and a half years, Alphabet's from three to six years, and Oracle's from five to six years. Microsoft and Amazon made similar changes, extending the term to six years.

Burry added that he will provide more details on Nov. 25. Alphabet, Amazon, Meta, Oracle and Microsoft did not provide prompt comment on Seeking Alpha's requests.

Meta's shares fell by 1.3% on the premarket on November 11. Since the publication of the quarterly report in late October, the company's quotes have fallen by 20% - which wiped out almost $240 billion of its capitalization, the Financial Times calculated. Investors were alarmed by Meta's plans to increase future capex to $100 billion, MarketWatch noted earlier. As a result of the collapse, Meta has been the worst performing Magnificent Seven stock this year.

On November 11, Oracle's securities fell by 1.1%, Alphabet - by 0.64%, Microsoft - by 0.3%, Amazon - by 0.2%. Reports from these companies also showed an increase in capital spending on AI infrastructure. In addition, long-standing concerns about overvaluation of the sector's stocks intensified amid warnings Wall Street giants Morgan Stanley and Goldman Sachs admitted the possibility of a correction.

Burry-managed hedge fund Scion Asset Management took short positions in shares of AI market favorites Nvidia and Palantir last quarter, according to its report on Form 13F. That signals investor wariness about the hype around artificial intelligence, which has been one of the drivers of stock market gains this year, Seeking Alpha said.

Almost simultaneously with the report's release, Burry posted another post on social media X, showing graphs illustrating the slowdown in cloud revenue growth and overheating investment in the tech sector, and a few days before that - hinting on his page that there could be a bubble in the market, adding that "sometimes the only winning move is not to get in the game."

This article was AI-translated and verified by a human editor