‘The Big Short’ Michael Burry slams Tesla (TSLA) valuation, warns of ‘ridiculous’ dilution

Michael Burry, the investor made famous by The Big Short, is back to criticizing Tesla (TSLA). In a new article, Burry takes aim at the “tragic algebra” of stock-based compensation (SBC), which focused primarily on NVIDIA, but the famed investors also specifically highlight Tesla’s high dilution rate and argue that the company’s pivot to robotics is just the latest narrative shift to prop up a “ridiculously overvalued” stock.

Burry is an interesting character. A trained neurologist, he made an unlikely transition into investing in the 1990s, becoming a deep-value investor managing a hedge fund.

He became famous for being one of the first to recognize the impending US subprime crisis and for betting against it. Or more accurately, he became famous from being featured in Michael Lewis’s The Big Short book, which covered his role in uncovering the crisis, and the subsequent movie of the same name, in which Christian Bale played him.

Earlier this year, Burry shut down his hedge fund and returned money to investors, freeing him to discuss the AI bubble publicly. He recently launched a new Substack and quickly became one of the main thought-leaders breaking down the anatomy of the AI bubble.

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Burry has had a tumultuous relationship with Tesla stock over the years, famously holding a massive short position against the automaker in 2021 before eventually closing it. While he has been quiet on Tesla for a while, his latest newsletter focuses on how tech companies use stock-based compensation to obscure their real costs.

While the bulk of his analysis targets Nvidia, his main target in the AI bubble, he dedicates a specific section to Tesla, and the math he presents is worth looking at for shareholders.

The “Tragic Algebra” of Dilution

Burry’s main argument is that Wall Street and investors generally ignore stock-based compensation when calculating earnings, treating it as a non-cash expense. He argues this is a mistake because it permanently dilutes existing shareholders.

Along with one of his associates, Burry has developed a formula that calculates the real dilution from stock options for companies.

He singles out Tesla as a prime offender when it comes to diluting its investors without offering buybacks to offset it:

Tesla dilutes its shareholders at about 3.6% per year, with no buybacks. The chart above shows the kind of present value destruction that this level of dilution can impart.

For context, Burry compares this to Amazon, which dilutes at roughly 1.3%, and Palantir, which is higher at 4.6%.

The concern here is that while Tesla reports profitability, a significant portion of the value created is being transferred directly to employees and management in the form of new shares, rather than retained by the current equity holders.

The Musk Pay Package

We reported extensively on Elon Musk’s massive compensation packages. After a judge rescinded his original massive ~$55 billion package, shareholders voted to reinstate it, and it is now up to the Delaware Supreme Court to decide whether Tesla can still use it or if it must fall back on a new $29 billion package it already pre-approved.

On top of this already absurd situation, shareholders recently approved a new stock option package for Musk worth up to $1 trillion.

Burry sees this package not as a reward for performance, but as a guarantee of future value destruction for current holders:

“With recent news of Elon Musk’s $1 trillion dollar pay package, dilution is certain to continue. Tesla’s market capitalization is ridiculously overvalued today and has been for a good long time.”

The issuance of those shares creates a massive overhang on the existing float. On top of a stock that already trades at almost 300 times earnings.

“The Elon Cult” and the Pivot to Robots

Perhaps the most biting comment in Burry’s note is regarding the shifting narrative around Tesla.

For years, Tesla was valued as an automotive growth story. As vehicle deliveries growth stopped in 2024 and reversed in 2025, the narrative shifted heavily toward the Cybercab and Optimus.

Burry characterizes this shifting focus as a way to keep the “cult” invested:

“[As an aside, the Elon cult was all-in on electric cars until competition showed up, then all-in on autonomous driving until competition showed up, and now is all-in on robots – until competition shows up.]”

While some could argue that these moves were made as Tesla took advantage of new technologies, the timeline Burry is highlighting is technically correct.

Electrek’s Take

I have a lot of respect for Burry. His arguments are sound and well-researched. I have been enjoying his Substack over the last few weeks, and he makes some undeniably great points about the AI bubble.

That said, it doesn’t necessarily make any of it a good short.

As John Maynard Keynes famously said, “the market can stay irrational longer than you can remain solvent.”

Tesla’s stock is undoubtedly irrational. A company with falling earnings trading at a P/E of 295 is absolutely insane.

Even rapidly growing tech companies run into problems when their price-to-earnings ratio hits 50. Tesla’s stock would have to crash ~80% or its earnings would have to increase by ~6x just to trade at a 50 P/E. And again, its earnings have been steadily declining for the past 2 years.

But it is being traded by irrational people who, as Burry pointed out, have a cult-like mentality toward Musk. That’s a recipe for disaster.