Michael Burry, the investor known for his prescient call on the 2000s housing market bubble, has taken aim at Tesla's valuation, calling it 'ridiculously overvalued'. Burry's critique focuses on the tech industry's widespread practice of issuing stock-based compensation, which he argues is not accurately reflected in earnings results. He believes that when accounting for the true profits, including the cost of this compensation and its negative impact on the company's value over time, Tesla's valuation should be significantly lower.
Burry highlights the issue of dilution, noting that Tesla dilutes shareholders at a rate of 3.6% annually and does not offer buybacks. He shared a chart with subscribers demonstrating the present value destruction caused by this level of dilution. The recent approval of Elon Musk's $1 trillion compensation plan further exacerbates the dilution issue, as investors can expect their ownership to be further diluted.
Burry also points out that other well-known tech companies, such as Palantir and Amazon, engage in similar practices of diluting shares through employee-based compensation, which he considers 'penalizing shareholders'. He argues that stock-based compensation is not accurately reflected under Generally Accepted Accounting Principles (GAAP) and that companies often use 'adjusted' earnings to present a bottom line that ignores this practice as a real expense.
Burry's concerns extend to the treatment of stock-based compensation, quoting Warren Buffett's view that it should be treated as a tangible expense. He launched his Substack newsletter, 'Cassandra Unchained', to share his views on artificial intelligence as a potential bubble. Burry's analysis and criticism have sparked discussions among investors and industry experts, with many curious to see how the market will respond to his bold claims.
