Prominent investor Michael Burry has issued a stark warning that the soaring valuations of major technology stocks are even more expensive than they appear. In a detailed analysis published this week, Burry argues that a widespread failure to properly account for the full costs of stock-based compensation (SBC) has created a significant "earnings illusion" across the Nasdaq 100.

The investor, famed for predicting and profiting from the 2008 financial crisis, stated his findings are based on a review of over 1,000 annual reports from Nasdaq 100 companies spanning the last decade. His central thesis is that current accounting practices and Wall Street analysis significantly overstate corporate earnings.

The $1.7 Trillion 'Earnings Illusion'

Burry's analysis claims that under standard accounting rules (GAAP), the earnings of Nasdaq 100 companies are overstated by nearly 20% because the costs of SBC are not fully factored in. He asserts that companies and analysts should include the money spent on share buybacks to offset dilution caused by SBC, as well as the net taxes related to shares vesting.

This accounting discrepancy means a stock trading at a GAAP price-to-earnings (P/E) ratio of 25 would have a real multiple closer to 30, according to Burry. He calculated that the 97 primary constituents of the Nasdaq 100 reported $4.9 trillion in cumulative GAAP net income over the decade ending in fiscal 2025.

However, Burry's adjusted figure for "true owners' earnings" sits at just $4.1 trillion, creating a $1.7 trillion gap which he labels the "earnings illusion." He wrote that this sum reflects "the difference between what shareholders really owned of corporate earnings and what Wall Street and media reported."

Wall Street Estimates Criticised

Burry was particularly critical of Wall Street analysts, whom he accused of adding back SBC costs to inflate earnings projections. He stated that their forward earnings estimates are 42% higher than the actual owners' earnings when properly adjusted for SBC.

"Wall Street over the last 10 years guided investors to 42% more earnings than ever actually existed," Burry wrote. He added that for every dollar of earnings per share that GAAP recognises, shareholders see only 83.49 cents, with the remainder going to employees.

"Putting this in perspective, if Wall Street earnings estimates are the basis for most discussion of index P/E ratios, those discussions are entirely, wholly, woefully misguided," Burry concluded.

Meta and Tesla Highlighted as Key Examples

Burry singled out several major companies to illustrate his argument. He stated that Meta Platforms Inc. has overstated owners' earnings by about 20%. While the social media giant might appear to trade at 19 times forward earnings, its real forward P/E multiple is 24 once SBC costs are included, he claimed.

He once again criticised Tesla Inc., noting its use of SBC is so substantial that removing it from his aggregate analysis reduces the overall GAAP overstatement from 20% to 12.5%. Burry also called out CEO Elon Musk's $1 trillion pay package, writing, "Such a beastly mass would dwarf everything in my data set."

Other companies mentioned in his analysis include Datadog, Workday, Axon, Shopify, Palantir, Marvell, CrowdStrike, and Zscaler, which he described as part of "a cesspool of shareholder disregard" from an owners' earnings perspective.

Broader Implications for Shareholders

Burry criticised the corporate practice of treating SBC as "free compensation they use to keep employees happy," warning it is a "serious issue" that can erode long-term shareholder returns. His warning comes amid a historic rally in technology stocks, largely driven by enthusiasm surrounding artificial intelligence.

Neither Meta nor Tesla responded to requests for comment from Business Insider on Burry's specific claims. The investor's analysis adds a critical voice to the debate over tech stock valuations, suggesting current metrics may not reflect the underlying economic reality for shareholders.