Aggressive Accounting or Fraud?

Last week we covered a major risk in the AI ecosystem:

Today I put it all together for you in one last, but very important, piece of information around the market’s favorite names.

Depreciation schedules, off-balance sheet deals, and inflated earnings.

Whether the AI trade works or not is not the point,

The point is whether you can (or will) make money from all this.

Alphabet (GOOGL) stock dropped by over 7% at one point this week, all in a single day.

Amazon (AMZN) followed along with NVIDIA (NVDA) all because of the same reason…

With the evidence shown last week, pointing to slowing demand and changing token economics, it’s pretty clear these titans have exposed themselves in a very bad way.

Because price wars and token cost declines will directly wipe out that speculative half of their EPS.

When logic returns to markets, stock prices should follow.

Apart from these inflated earnings, there is one deceptive accounting practice happening at the same time.

And it’s all tied to depreciation schedules.

For my non-accounting audience, depreciation is typically taken out as a cost in the income statement and then added back through the cash flow statement (since no cash actually left the business.)

However,

It’s good practice to add these costs as they will eventually be paid either quarterly or all at once.

Most AI-related companies are choosing to pay all at once rather than periodically.

It would be as if you delayed paying three years of income tax, and the entire deferred payment came due in the fourth year.

Your cash income would dramatically differ from your paper income, wouldn’t it?

That’s exactly what will happen to these companies.

The important question is:

Because one corner of the market wins in both outcomes.

And that’s where we’re focusing today.

So, how exactly are these companies inflating their earnings through delayed depreciation?