Investor Michael Burry argues that AI-focused companies like Nvidia are overstating earnings by using overly optimistic depreciation estimates for hardware, potentially leading to a burst in the AI stock bubble if rates accelerate.

Burry believes companies will need to increase depreciation rates to reflect rapid AI technological development, potentially affecting earnings of companies like Oracle and Meta Platforms by up to 27% and 21%, respectively.

Hyperscalers like Alphabet, Amazon, Meta Platforms, Microsoft, and Oracle have adjusted their depreciation rates for network equipment and servers, potentially supporting Burry’s argument.

Critics argue that manipulating depreciation rates for earnings could negatively impact cash flow, but companies like Alphabet, Microsoft, and Meta Platforms are still cash-generative despite significant AI spending.

Investing in Nvidia may be risky amid the potential burst of the AI stock bubble, with a focus on cash-flow-based valuations recommended over earnings-based assessments. The overall level of investment growth in AI may need to be scaled back in the future.

Read more at Nasdaq: Understanding Michael Burry’s Bet Against AI: Here’s What it Really Means for Investors