{"id":32099,"date":"2025-11-19T14:25:09","date_gmt":"2025-11-19T19:25:09","guid":{"rendered":"https:\/\/breakingintowallstreet.com\/?post_type=biws_kb&#038;p=32099"},"modified":"2025-12-17T00:19:01","modified_gmt":"2025-12-17T05:19:01","slug":"capex-depreciation","status":"publish","type":"biws_kb","link":"https:\/\/breakingintowallstreet.com\/kb\/accounting\/capex-depreciation\/","title":{"rendered":"CapEx &#038; Depreciation: Michael Burry vs. AI and Big Tech"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_81 counter-flat ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">CapEx &amp; Depreciation: Michael Burry vs. AI and Big Tech<\/p>\n<span class=\"ez-toc-title-toggle\"><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/capex-depreciation\/#How_Do_CapEx_Depreciation_Normally_Work_on_the_Financial_Statements\">How Do CapEx &amp; Depreciation Normally Work on the Financial Statements?<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/capex-depreciation\/#So_How_Do_CapEx_Depreciation_Accounting_Affect_a_Companys_Valuation\">So, How Do CapEx &amp; Depreciation Accounting Affect a Company&#8217;s Valuation?<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/capex-depreciation\/#Michael_Burry_vs_AI_and_Big_Tech_Why_No_One_is_%E2%80%9CRight%E2%80%9D_About_CapEx_and_Depreciation_of_Nvidia_GPUs\">Michael Burry vs. AI and Big Tech: Why No One is \u201cRight\u201d About CapEx and Depreciation of Nvidia GPUs<\/a><\/li><\/ul><\/nav><\/div>\n\n<blockquote><p><strong>CapEx &amp; Depreciation Definition:<\/strong> In accounting, capital expenditures (CapEx) represent a company\u2019s spending on long-term assets that will last for multiple years; since they will be useful for many years, this CapEx spending must be allocated over time and recorded as \u201cDepreciation\u201d on the Income Statement. This Depreciation number reduces the company\u2019s Pre-Tax Income and counts as a tax deduction in the current period, but the CapEx does not.<\/p><\/blockquote>\n<p>Michael Burry, famous from <em>The Big Short<\/em>, recently made waves on X when he claimed that many Big Tech companies, such as Oracle and Meta, <a href=\"https:\/\/x.com\/michaeljburry\/status\/1987918650104283372\" target=\"_blank\" rel=\"noopener\">have overstated their earnings by understating their Depreciation<\/a>:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-32100\" title=\"Nvidia Depreciation\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/11\/19141438\/00-Nvidia-Depreciation.jpg\" alt=\"Nvidia Depreciation\" width=\"700\" height=\"785\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/11\/19141438\/00-Nvidia-Depreciation.jpg 1026w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/11\/19141438\/00-Nvidia-Depreciation-268x300.jpg 268w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/11\/19141438\/00-Nvidia-Depreciation-914x1024.jpg 914w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/11\/19141438\/00-Nvidia-Depreciation-768x861.jpg 768w\" sizes=\"(max-width: 700px) 100vw, 700px\" \/><\/p>\n<p>Between 2020 and 2025, these companies <em>extended<\/em> the useful lives of the GPUs and data centers they use for AI, thereby reducing depreciation on the <a href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/income-statement\/\" target=\"_blank\" rel=\"noopener\">Income Statement<\/a>.<\/p>\n<p>For example, if Microsoft buys new Nvidia chips for $90 million, it records Depreciation of $30 million per year if the useful life is 3 years, but $18 million per year if the useful life is 5 years.<\/p>\n<p>Burry claims that since many of these chips and servers are on 2-3-year \u201cproduct cycles,\u201d these Big Tech companies have significantly <strong>overstated their earnings<\/strong>, implying that they are currently overvalued.<\/p>\n<p><strong>This is not quite correct because the proper way to value a company is with metrics that normalize a company\u2019s capital structure and Depreciation policies \u2013 such as <a href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/ebitda\/\" target=\"_blank\" rel=\"noopener\">EBITDA<\/a> \u2013 and with a DCF based on <a href=\"https:\/\/breakingintowallstreet.com\/kb\/discounted-cash-flow-analysis-dcf\/unlevered-free-cash-flow\/\" target=\"_blank\" rel=\"noopener\">Unlevered Free Cash Flow<\/a>, which does something similar.<\/strong><\/p>\n<p>Ironically, depreciating assets <em>more quickly<\/em> can <em>boost<\/em> a company\u2019s valuation because of the tax savings that come from this.<\/p>\n<p>That said, higher Depreciation also tends to imply that future CapEx will be higher because companies must spend more to replace and upgrade their assets.<\/p>\n<p>Therefore, the key question is not whether Depreciation is \u201cunderstated,\u201d but the proper <strong>mix<\/strong> of Depreciation and CapEx (as percentages of revenue).<\/p>\n<p>Also, we need to know something about the future revenue and cash flows that might be generated by this very high CapEx, which no company has yet been able to estimate.<\/p>\n<p>To explain how this works, we\u2019ll start with a quick review of the standard accounting for CapEx and Depreciation:<\/p>\n<h3><strong>Files &amp; Resources:<\/strong><\/h3>\n<ul>\n<li><a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.dualstack.us-east-1.amazonaws.com\/Accounting\/CapEx-Depreciation\/105-38-CapEx-Depreciation.xlsx\" target=\"_blank\" rel=\"noopener\">CapEx and Depreciation &#8211; Accounting and Valuation Examples (XL)<\/a><\/li>\n<li><a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.dualstack.us-east-1.amazonaws.com\/Accounting\/CapEx-Depreciation\/105-38-CapEx-Depreciation-Slides.pdf\" target=\"_blank\" rel=\"noopener\">CapEx and Depreciation &#8211; Presentation Slides (PDF)<\/a><\/li>\n<\/ul>\n<h3><strong>Video Table of Contents:<\/strong><\/h3>\n<ul>\n<li><strong>0:00:<\/strong> Introduction<\/li>\n<li><strong>1:41:<\/strong> The Short Answer<\/li>\n<li><strong>5:19:<\/strong> Part 1: CapEx and Depreciation Accounting<\/li>\n<li><strong>8:57:<\/strong> Part 2: CapEx and Depreciation in Valuation and the DCF<\/li>\n<li><strong>11:56:<\/strong> Part 3: Why No One is \u201cRight\u201d About This AI CapEx Debate<\/li>\n<li><strong>13:31:<\/strong> Recap and Summary<\/li>\n<\/ul>\n<h2><span class=\"ez-toc-section\" id=\"How_Do_CapEx_Depreciation_Normally_Work_on_the_Financial_Statements\"><\/span><strong>How Do CapEx &amp; Depreciation Normally Work on the Financial Statements?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>To illustrate the accounting, let\u2019s say that a company spends $100 on CapEx on January 1 of the year, such as $100 for a new data center or factory.<\/p>\n<p>On the financial statements, the initial CapEx shows up as a cash outflow on the <a href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/cash-flow-statement\/\" target=\"_blank\" rel=\"noopener\">Cash Flow Statement<\/a>, reduces Cash on the Balance Sheet, and increases Net PP&amp;E.<\/p>\n<p>The <a href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/balance-sheet\/\" target=\"_blank\" rel=\"noopener\">Balance Sheet<\/a> remains in balance because one Asset has decreased by $100, and another has increased by $100:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-32101\" title=\"Balance Sheet - Changes Due to CapEx\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/11\/19141529\/01-Balance-Sheet-CapEx-Changes.jpg\" alt=\"Balance Sheet - Changes Due to CapEx\" width=\"700\" height=\"468\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/11\/19141529\/01-Balance-Sheet-CapEx-Changes.jpg 1125w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/11\/19141529\/01-Balance-Sheet-CapEx-Changes-300x201.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/11\/19141529\/01-Balance-Sheet-CapEx-Changes-1024x684.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/11\/19141529\/01-Balance-Sheet-CapEx-Changes-768x513.jpg 768w\" sizes=\"(max-width: 700px) 100vw, 700px\" \/><\/p>\n<p>The company believes that the <strong>salvage value<\/strong> of this newly purchased asset is $0, so it won\u2019t be able to sell it for anything at the end of its useful life.<\/p>\n<p>Management also believes that this asset should be useful for about 10 years, so it depreciates the following amount each year in a straight-line pattern:<\/p>\n<p><strong>Depreciation<\/strong> = (Initial CapEx \u2013 Salvage Value) \/ Useful Life<\/p>\n<p><strong>Depreciation<\/strong> = ($100 \u2013 $0) \/ 10 years = $10 per year<\/p>\n<p>Therefore, the company must record $10 in Depreciation for the entire year (i.e., from January 1 to December 31) on its financial statements.<\/p>\n<p>This appears on the <a href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/income-statement\/\" target=\"_blank\" rel=\"noopener\">Income Statement<\/a>, reduces Pre-Tax Income by $10, and reduces Net Income by $7.5 at a 25% tax rate.<\/p>\n<p>On the Cash Flow Statement, Net Income is lower by $7.5, the $10 in Depreciation gets added back, the $100 of CapEx is still there, and Cash at the bottom is down by $97.5.<\/p>\n<p>The intuition is that the CapEx reduced Cash by $100, but the Depreciation provided <strong>$2.5 in tax savings<\/strong>, so Cash is down by only $97.5:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-32102\" title=\"Balance Sheet - CapEx and Depreciation Changes\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/11\/19141604\/02-Balance-Sheet-CapEx-Depreciation.jpg\" alt=\"Balance Sheet - CapEx and Depreciation Changes\" width=\"700\" height=\"470\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/11\/19141604\/02-Balance-Sheet-CapEx-Depreciation.jpg 1119w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/11\/19141604\/02-Balance-Sheet-CapEx-Depreciation-300x202.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/11\/19141604\/02-Balance-Sheet-CapEx-Depreciation-1024x688.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/11\/19141604\/02-Balance-Sheet-CapEx-Depreciation-768x516.jpg 768w\" sizes=\"(max-width: 700px) 100vw, 700px\" \/><\/p>\n<p>On the Balance Sheet, Cash is down by $97.5, Net PP&amp;E is up by $90 due to the $100 of CapEx minus the $10 of Depreciation, and so Total Assets are down by $7.5.<\/p>\n<p>On the other side, <a href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/statements-of-owners-equity\/\" target=\"_blank\" rel=\"noopener\">Common Shareholders\u2019 Equity<\/a> is also down by $7.5 due to the reduced <a href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/net-income\/\" target=\"_blank\" rel=\"noopener\">Net Income<\/a>, so both sides of the Balance Sheet balance:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-32103\" title=\"Balance Sheet - Balancing the L&amp;E Side\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/11\/19141649\/03-Balance-Sheet-Liabilities-Equity-Balance.jpg\" alt=\"Balance Sheet - Balancing the L&amp;E Side\" width=\"700\" height=\"448\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/11\/19141649\/03-Balance-Sheet-Liabilities-Equity-Balance.jpg 1135w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/11\/19141649\/03-Balance-Sheet-Liabilities-Equity-Balance-300x192.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/11\/19141649\/03-Balance-Sheet-Liabilities-Equity-Balance-1024x655.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/11\/19141649\/03-Balance-Sheet-Liabilities-Equity-Balance-768x491.jpg 768w\" sizes=\"(max-width: 700px) 100vw, 700px\" \/><\/p>\n<p><strong>The key point here is that the CapEx reduces the company\u2019s cash flows, but not its \u201cEarnings\u201d or Net Income \u2013 only the Depreciation after the fact affects that.<\/strong><\/p>\n<h2><span class=\"ez-toc-section\" id=\"So_How_Do_CapEx_Depreciation_Accounting_Affect_a_Companys_Valuation\"><\/span><strong>So, How Do CapEx &amp; Depreciation Accounting Affect a Company&#8217;s Valuation?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>If you use a <a href=\"https:\/\/breakingintowallstreet.com\/kb\/valuation\/valuation-multiples\/\" target=\"_blank\" rel=\"noopener\">valuation multiple<\/a> that ignores or adds back Depreciation, such as TEV \/ EBITDA, the useful life of a company\u2019s capital assets makes no direct impact.<\/p>\n<p>EBITDA literally <strong>ignores<\/strong> Depreciation \u2013 it\u2019s even in the name! (\u201cEarnings Before Interest, Taxes, Depreciation &amp; Amortization\u201d).<\/p>\n<p>To demonstrate, here\u2019s what the EBITDA multiples look like for two companies that are the same in all ways except for their Depreciation figures:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-32104 size-full\" title=\"Impact of Depreciation on P \/ E vs. EBITDA Multiples\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/11\/19141717\/04-Depreciation-PE-EBITDA-Multiples.jpg\" alt=\"Impact of Depreciation on P \/ E vs. EBITDA Multiples\" width=\"2239\" height=\"295\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/11\/19141717\/04-Depreciation-PE-EBITDA-Multiples.jpg 2239w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/11\/19141717\/04-Depreciation-PE-EBITDA-Multiples-300x40.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/11\/19141717\/04-Depreciation-PE-EBITDA-Multiples-1024x135.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/11\/19141717\/04-Depreciation-PE-EBITDA-Multiples-768x101.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/11\/19141717\/04-Depreciation-PE-EBITDA-Multiples-1536x202.jpg 1536w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/11\/19141717\/04-Depreciation-PE-EBITDA-Multiples-2048x270.jpg 2048w\" sizes=\"(max-width: 2239px) 100vw, 2239px\" \/><\/p>\n<p><strong>The TEV \/ EBITDA multiples are the same, but the P \/ E multiples differ, and the company with higher Depreciation, indicating a shorter average useful life, \u201clooks\u201d more valuable.<\/strong><\/p>\n<p>This is why you should focus on metrics and multiples that better normalize for these issues, such as EBITDA and Unlevered FCF.<\/p>\n<p>In a DCF, since Depreciation is deducted to calculate taxes and then added back as a non-cash expense, the exact number matters mostly for the <strong>tax savings<\/strong> it provides.<\/p>\n<p>In some sense, the \u201cspread\u201d between Depreciation and CapEx also matters, but it depends heavily on how the model drivers work; the absolute CapEx level still matters most.<\/p>\n<p>It\u2019s difficult to show the exact impact of a longer or shorter useful life, but we can simulate it by <strong>changing the Depreciation number.<\/strong><\/p>\n<p>For example, if CapEx is currently 15% of Revenue, and Depreciation is 12% of Revenue, the output from a simple DCF looks like this:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-32105 size-full\" title=\"Baseline CapEx and Depreciation in a DCF\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/11\/19142014\/05-Baseline-CapEx-Depreciation-DCF.jpg\" alt=\"Baseline CapEx and Depreciation in a DCF\" width=\"2040\" height=\"397\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/11\/19142014\/05-Baseline-CapEx-Depreciation-DCF.jpg 2040w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/11\/19142014\/05-Baseline-CapEx-Depreciation-DCF-300x58.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/11\/19142014\/05-Baseline-CapEx-Depreciation-DCF-1024x199.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/11\/19142014\/05-Baseline-CapEx-Depreciation-DCF-768x149.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/11\/19142014\/05-Baseline-CapEx-Depreciation-DCF-1536x299.jpg 1536w\" sizes=\"(max-width: 2040px) 100vw, 2040px\" \/><\/p>\n<p>But if the company <em>extends<\/em> the average useful life of its assets, so that its Depreciation falls to 10% of Revenue, the implied values from the DCF <strong>decrease:<\/strong><\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-32106 size-full\" title=\"DCF with Reduced Depreciation\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/11\/19142046\/06-DCF-Lower-Depreciation.jpg\" alt=\"DCF with Reduced Depreciation\" width=\"2039\" height=\"387\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/11\/19142046\/06-DCF-Lower-Depreciation.jpg 2039w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/11\/19142046\/06-DCF-Lower-Depreciation-300x57.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/11\/19142046\/06-DCF-Lower-Depreciation-1024x194.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/11\/19142046\/06-DCF-Lower-Depreciation-768x146.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/11\/19142046\/06-DCF-Lower-Depreciation-1536x292.jpg 1536w\" sizes=\"(max-width: 2039px) 100vw, 2039px\" \/><\/p>\n<p>This happens because when Depreciation is lower, <strong>the tax benefits<\/strong> are spread out over a longer period, reducing their <a href=\"https:\/\/breakingintowallstreet.com\/kb\/finance\/present-value\/\" target=\"_blank\" rel=\"noopener\">Present Value<\/a>.<\/p>\n<p>So\u2026 on the surface, it seems like <em>shorter useful lives<\/em> improve valuations!<\/p>\n<p><strong>There is a caveat, though: These useful-life changes do not occur in a vacuum.<\/strong><\/p>\n<p>If a company reduces the average useful life of its assets, that tends to imply that it must <strong>spend more on CapEx<\/strong> to replace and upgrade these assets more frequently.<\/p>\n<p>If <em>both<\/em> CapEx and Depreciation change, anything could happen.<\/p>\n<p>For example, here\u2019s the difference between a 15% CapEx \/ 12% Depreciation scenario and an 18% CapEx \/ 15% Depreciation scenario:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-32107 size-full\" title=\"DCF - CapEx and Depreciation Sensitivity\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/11\/19142112\/07-DCF-Sensitivity.jpg\" alt=\"DCF - CapEx and Depreciation Sensitivity\" width=\"1341\" height=\"305\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/11\/19142112\/07-DCF-Sensitivity.jpg 1341w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/11\/19142112\/07-DCF-Sensitivity-300x68.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/11\/19142112\/07-DCF-Sensitivity-1024x233.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/11\/19142112\/07-DCF-Sensitivity-768x175.jpg 768w\" sizes=\"(max-width: 1341px) 100vw, 1341px\" \/><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Michael_Burry_vs_AI_and_Big_Tech_Why_No_One_is_%E2%80%9CRight%E2%80%9D_About_CapEx_and_Depreciation_of_Nvidia_GPUs\"><\/span><strong>Michael Burry vs. AI and Big Tech: Why No One is \u201cRight\u201d About CapEx and Depreciation of Nvidia GPUs<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>As shown above, a company\u2019s estimated useful life for its assets and its CapEx &amp; Depreciation policies do impact the results of a DCF-based valuation.<\/p>\n<p><strong>But in the grand scheme of things, the effect size is quite small; no one buys one company and sells another because of a useful-life difference of 4 vs. 6 years.<\/strong><\/p>\n<p>The real question is the <em>additional revenue and cash flows<\/em> generated by all this AI CapEx.<\/p>\n<p>Various people and firms have attempted to estimate this, but no one has a true answer because the Big Tech firms do not break out their results in a useful way.<\/p>\n<p>Yes, many of them have recorded impressive growth rates, but it\u2019s unclear whether that growth has been <em>sustained by AI spending<\/em> or <em>would have happened without spending<\/em> ten gazillion dollars on data centers and GPUs.<\/p>\n<p>For a consumer\/retail or restaurant business, we could estimate the impact of CapEx by determining the <strong>revenue per new store<\/strong> and the expenses associated with it, and weighing those against the construction time and budget:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-32108 size-full\" title=\"Growth CapEx and Revenue Growth in Retail\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/11\/19142139\/08-Growth-CapEx-Revenue.jpg\" alt=\"Growth CapEx and Revenue Growth in Retail\" width=\"1864\" height=\"1072\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/11\/19142139\/08-Growth-CapEx-Revenue.jpg 1864w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/11\/19142139\/08-Growth-CapEx-Revenue-300x173.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/11\/19142139\/08-Growth-CapEx-Revenue-1024x589.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/11\/19142139\/08-Growth-CapEx-Revenue-768x442.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/11\/19142139\/08-Growth-CapEx-Revenue-1536x883.jpg 1536w\" sizes=\"(max-width: 1864px) 100vw, 1864px\" \/><\/p>\n<p>But nothing like this exists for Big Tech or other AI-centric companies.<\/p>\n<p>Until it does, these debates about the proper Depreciation policy or the useful life of GPUs are distractions from the main issue.<\/p>\n<p><strong>Michael Burry might be right, or he might be wrong, but it doesn\u2019t matter until we have some way of measuring the long-term cash-flow impact of this very high AI CapEx.<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"<p>In accounting, capital expenditures (CapEx) represent a company\u2019s spending on long-term assets that will last for multiple years; since they will be useful for many years, this CapEx spending must be allocated over time and recorded as \u201cDepreciation\u201d on the Income Statement. This Depreciation number reduces the company\u2019s Pre-Tax Income and counts as a tax deduction in the current period, but the CapEx does not.<\/p>\n","protected":false},"featured_media":0,"template":"","class_list":["post-32099","biws_kb","type-biws_kb","status-publish","hentry","kb_category-accounting"],"acf":[],"_links":{"self":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb\/32099","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb"}],"about":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/types\/biws_kb"}],"wp:attachment":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/media?parent=32099"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}