Nate Clark's Writing

People who talk to me regularly know I’m a bit worried about overinvestment in AI infrastructure and the danger it poses to the economy. Heck I even dressed up as the AI bubble for Halloween:

I’m also fairly interested in finance and how companies are run, so recent reporting on how the hyper-scalers are changing their accounting for hardware purchases struck me as very sardonically amusing.

Recall from my post on financial statements, that a company’s income statement is supposed to reflect the steady-state profitability of a company. When companies buy equipment or buildings that last for a long time, they depreciate those assets, which means only applying a portion of the costs to their reported profitability each year. For example, if my new company Amalgamated AI Blockchain and Iced Tea Corp bought $600,000 of GPUs today and estimated they will last 3 years, then the company would subtract $200k from its profits for each of the next 3 years.

Where did that “3 year” number come from? The company just makes it up. If it suddenly decided those same GPUs will last 5 years, then they’d only have to subtract $120k from their profits each year for the next 5 years instead. This obviously makes their earnings look a lot better in the short term.

From the article linked above:

[This year] Meta Platforms increased the estimated useful lives for most of its servers and network assets to 5.5 years. It previously said it used a range of four to five years. As recently as 2020, Meta said it used as little as three years.

Meta said the latest extension reduced its depreciation expense by $2.3 billion for the first nine months of 2025.

Alphabet, Microsoft, and Amazon also use longer useful lives for similar assets than they did five years ago. Alphabet and Microsoft are at six years, up from three in 2020. Amazon used a four-year period in 2020 and was up to six years by 2024, but this year cut the number to five years for some servers and networking equipment.

Michael Burry, the famed investment manager played by Christian Bale in 2015’s film “The Big Short,” recently added fuel to the fire. “Extending useful life decreases depreciation expense and increases apparent profits,” he wrote in an article last month. “It is one of the more common frauds of the modern era and results in overvalued assets and overstated profits.”

I’m sure these companies increasing their depreciation length is all because the hardware is getting SO MUCH MORE RELIABLE, and has nothing to do with trying to hide the massive costs of AI infrastructure buildout from investors. (And don’t even get me started on all the “joint ventures” these guys control to hide infrastructure spending in different legal entities). This ride could get bumpy; hold onto your hats, folks.