The Profit That Wasn't: Michael Burry on how $1.7 trillion was "ripped off" from investors
A "Downgrade Game" investor believes Wall Street is distorting the real earnings of companies in the Nasdaq 100 - and it's devaluing investors' investments
Burry considers Tesla one of the companies most dismissive of shareholder interests / Photo: Photo by Astrid Stawiarz / Getty Images
Michael Burry, a well-known short-seller, believes that Wall Street has been painting too pretty a picture of the profits of the largest U.S. companies for years. After analyzing nearly 100 issuers in the Nasdaq 100 index - from Apple and Nvidia to Alphabet and Meta - he concluded that analysts underestimate how much employee stock compensation actually costs investors. He calculated that over the past decade, it has given the market "the illusion of a $1.7 trillion profit."
In his Cassandra Unchained blog, Burry breaks down exactly how employee compensation dilutes investor stakes and compiles an anti-rating of the companies that are most dismissive of shareholders.
Illusory profits
Burry argues that the record profits of Nasdaq 100 companies are largely an illusion: the market underestimates how profits are affected by employee stock-based compensation (SBC). If you turn a blind eye, the combined profits of companies in the Nasdaq 100 index look 42% larger than they really are, Burry calculates. For example, chip equipment maker Lam Research, according to his calculations, overstated its profits by 49.1%: this means that for every dollar the company earned under GAAP, shareholders actually received 67 cents. The rest was "eaten up" by employee stock-based compensation.
"It's sad that no one in the mainstream media or on Wall Street is willing to discuss this issue seriously. But what's more unfortunate is that instead of open dialog, Wall Street is simply adding the 'non-cash' cost of employee stock compensation back into its projections - as if it's not an expense at all - and the mainstream business press is just actively singing along. Customers, shareholders, investors and even random people at airports are being forced to listen to comments that are fundamentally flawed and dangerously misleading"
Burry believes it's more accurate to value companies based on the "owner's real earnings," adjusted for stock compensation. The formula he derived involves taking a company's GAAP net income, adding its bonus expense, and subtracting the market value of stock given to employees and the taxes the company paid on that stock. What's left, Burry calls, is the real money a shareholder can claim.
Sad algebra
Issuing stock to employees, Burry argues, reduces investors' stake in the company in two ways. The first is direct dilution. When a company issues new shares, the share of existing shareholders is reduced.
The second mechanism is buybacks. To keep the number of shares outstanding from growing, companies spend billions on buybacks, but much of this money does not create new value for shareholders, but simply closes the dilution created by employee benefits.
"This - issuing shares at a price potentially below their intrinsic value and then buying them back at a price much higher - is precisely the fundamental process by which temporary hyper-growth, bubbles and beautiful legends actually stifle intrinsic value-per-share growth for shareholders of companies abusing SBCs"
Nvidia illustrates this pattern, Burry writes. He calls it an example of "buybacks to nowhere": the company spends huge sums on buybacks, but much of this money does not create new value for shareholders, but only compensates for dilution due to employee bonuses. By his calculations, Nvidia's profits have been overstated by 28.9% over ten years. In fiscal 2026 alone, the company spent $40.1 billion on share repurchases, of which $15.5 billion went to offset dilution and another $7.3 billion on related tax payments.
"When a shareholder only gets 83 cents of every dollar earned, the difference accumulates in a non-linear way. This is the fundamental reason why dilution hits so hard. Even if an investor retains 95% of every dollar of earnings, over time that results in a much smaller return to the shareholder."
"The Tragic List."
Burry highlights nine companies he calls "a hotbed of disregard for investor interests." This "tragic list," he writes, includes Palantir, CrowdStrike, Datadog, Axon, Workday, Zscaler, Shopify, Marvell and Tesla. He calculates that over the past 10 years, these companies have handed out stock to employees worth more than all of their total profits.
"Collectively, the nine declared $42 billion in net income during the period studied. The owners' real aggregate profits are deeply negative at minus $267 billion"
Burry believes that in these companies, stock issuance to staff is so massive that it eats away not only profits, but the very value of the business to its owners.
A special place in this anti-rating is occupied by Tesla, which Burry calls a "space elephant". Elon Musk's shareholder compensation package is so large that it distorts the performance of the entire Nasdaq 100 index. If Tesla alone is excluded from the calculations, the overall pattern of earnings overstatement across the entire index drops from 20% to 12.5%. If all nine companies are excluded from the index, profit overstatement drops from 19.78% to 11.50%.
"An investor who buys an index fund (ETF) on the Nasdaq 100 is simply getting these companies "on the take" with all their employee debt. You can't cut off the 'tragic list' - you own them outright, taking on all this insanity"
Who else is at risk?
Burry also identifies a large group of companies where stock-based payments to employees do not appear to be a tragedy, but nevertheless distort the profit picture.
Over 11 years, Burry writes, 42% of Salesforce's increase in intrinsic value per share went to employees. When Salesforce began buying back tens of billions of dollars worth of stock between 2023 and 2026, it didn't create new value for shareholders, Burry argues: the buybacks only eliminated the accumulated effect of previous dilution.
Burry includes other large companies in the zone where profit margins look markedly inflated: AMD and Intuit have it at 32.6%, Synopsys at 30.8%, Netflix at 22.9%, and Amazon at 21%.
Meta, which Burry analyzes separately, over the decade shows a 19.98% overstatement of profits, and the gap has only grown in recent years. If on average, according to the investor's calculations, the company's shareholders received about 83% of the reported profit, in fiscal 2025 - only 64%.
Companies without the sad math
Burry emphasizes that the problem of profit overstatement is not evenly distributed across the Nasdaq 100. There are companies where employee compensation barely distorts the picture: he cites ADP with 1.5% overstatement of earnings, Micron with 1.3% and Fastenal with 1.4% as examples. This also includes Apple and Microsoft more broadly. Despite their status as major technology companies, they look relatively restrained in Burry's assessment: Apple's profit overstatement is 7.5% and Microsoft's is 9.8%.
Burry singles out companies whose reports understate shareholder returns. ASML's GAAP earnings, according to his calculations, are 3.1% below shareholder returns. This group also includes Walmart, PepsiCo, Intel and CSX. Burry writes that buybacks from these companies work so efficiently that they outweigh the costs of paying employees in stock.
This article was AI-translated and verified by a human editor
