The AI Chip Depreciation Debate

In November 2025, hedge-fund manager Michael Burry, whose bet against subprime mortgages was dramatized in the 2015 movie The Big Short, accused the major technology companies of inflating earnings by extending depreciation schedules on AI hardware, calling it “one of the more common frauds of the modern era.” The case places students in the role of an analyst at an AI-focused investment fund who must evaluate Burry&apos;s thesis and prepare the fund&apos;s response to nervous investors. Preparing that response forces the protagonist through a series of increasingly consequential questions. What is depreciation, and why does it matter if it is a noncash charge? How much discretion do managers have over useful-life estimates under GAAP, and what happens to reported earnings when they exercise it? Can a chip that physically functions for a decade become economically obsolete in two years, and if so, what does the matching principle require? And if Burry is right that earnings are overstated, does that necessarily mean these stocks are overvalued? The case is designed for core financial accounting or financial statement analysis and valuation courses, with emphasis adaptable to each context.<p>Excerpt</p><p>The AI Chip Depreciation Debate</p><p>On the morning of November 11, 2025, Cecilia Chu arrived at the offices of Prometheus Capital (Prometheus) to find her colleagues clustered around a Bloomberg terminal. The previous evening, Michael Burry—the hedge-fund manager whose bet against subprime mortgages had been dramatized in the 2015 movie The Big Short—had broken a long public silence with a provocative claim: The major technology companies were “understating depreciation by extending useful life of assets,” a practice he labeled “one of the more common frauds of the modern era.”</p><p>For Prometheus, the accusation hit close to home. The firm had been founded in 2023 to capitalize on the AI boom, offering actively managed exposure to the companies building AI infrastructure. Its flagship fund held substantial positions in Microsoft Corporation (Microsoft); Alphabet Inc. (Alphabet); Meta Platforms, Inc. (Meta); and Oracle Corporation (Oracle)—precisely the “hyperscalers” (industry shorthand for the largest cloud infrastructure providers) that Burry was accusing of accounting manipulation. By noon, Chu had fielded three calls from nervous investors asking whether Prometheus needed to reassess its positions. She convened an informal meeting with two colleagues to discuss the fund&apos;s response.</p><p>Marcus Webb, who had joined Prometheus after 15 years as an investment banker, was dismissive. “Why does Burry even care about this? Depreciation isn&apos;t cash flow—it doesn&apos;t matter for valuing companies. All that matters is EBITDA. He&apos;s making noise about something that&apos;s irrelevant to investors.” Priya Sharma, who had come to Prometheus from a product management role at a cloud-computing start-up, looked puzzled. “I thought depreciation was basically a tax deduction—not a real expense. If Burry&apos;s saying these companies should take more depreciation, wouldn&apos;t that lower their taxes? Why would that be a problem?”</p><p>. . .</p>