What is dilution-aware valuation?

Dilution-aware valuation accounts for the impact of stock-based compensation (SBC) on shareholder value. Traditional models ignore SBC dilution, but Michael Burry's approach adjusts the valuation formula to reflect the true cost of equity dilution from stock grants and options.

What is Owner's Earnings?

Owner's Earnings is a cash flow metric that represents the true earnings available to shareholders. It's calculated as: Net Income + GAAP SBC (add back non-cash) - Actual Stock Buybacks - RSU Tax Withholding Payments. This shows the real cash cost of stock-based compensation.

How is this different from a regular DCF calculator?

Unlike traditional DCF calculators that use GAAP earnings or free cash flow, BurryDCF uses Owner's Earnings which properly accounts for stock-based compensation costs. It also applies a dilution adjustment to the Gordon Growth Model formula to reflect ongoing shareholder dilution.

Where does the data come from?

BurryDCF pulls data directly from SEC EDGAR XBRL filings (10-K and 10-Q reports) for Owner's Earnings components, and uses Polygon.io for real-time stock prices, dividends, and company information. All data sources are transparent and verifiable.

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Educational Content

Valuation Methodology

A deep dive into the mathematics of dilution-aware stock valuation

Contents

1. Traditional Gordon Growth Model (GGM)

The foundation of perpetuity-based valuation

The Gordon Growth Model (also called the Dividend Discount Model) calculates the present value of a perpetually growing stream of cash flows. It's the foundation of most intrinsic value calculations.

The Formula

PV = CF₁ / (d - g)

Variables

PV = Present Value (fair value per share)
CF₁ = Expected cash flow next year
d = Discount rate (required return)
g = Perpetual growth rate

Key Constraint

d > g

The discount rate must exceed the growth rate, otherwise the formula produces negative or infinite values.

Example Calculation

A company with $5 per share cash flow, 10% discount rate, and 3% growth:

PV = $5 / (0.10 - 0.03) = $5 / 0.07 = $71.43

2. The Dilution Problem

Why traditional valuation overstates intrinsic value

The traditional GGM assumes your ownership percentage stays constant. But in reality, companies continuously issue new shares through stock-based compensation (SBC), diluting existing shareholders.

The Hidden Cost

When a company grants stock options or RSUs to employees, your slice of the pie gets smaller—even if the pie is growing. Traditional models ignore this.

Real-World Example: NVIDIA (2018-2025)

Metric	Amount
GAAP Net Income	$205B
+ GAAP SBC (add-back)	+$20.6B
Wall Street "Adjusted" Earnings	$226B
- Actual Buybacks	-$91B
- RSU Tax Withholdings	-$21.5B
TRUE Owner's Earnings	$114B

Earnings Quality: 50% — Wall Street overstates NVIDIA's earnings by 2x!

The GAAP SBC expense ($20.6B) is essentially meaningless. The TRUE cost of SBC was $112.5B (buybacks + RSU taxes)—5.5x higher than the accounting expense!

3. Owner's Earnings (Burry's Method)

The true cash flow available to shareholders

Michael Burry's Owner's Earnings formula calculates the actual cash flow that belongs to shareholders after accounting for the real cost of stock-based compensation.

Owner's Earnings Formula

OE = NI + SBC − Buybacks − RSU Tax

Add Back (+)

NI = Net Income (GAAP)
SBC = Stock-Based Compensation expense (non-cash)

Subtract (−)

Buybacks = Cash spent repurchasing shares
RSU Tax = Cash paid for RSU tax withholdings

SEC XBRL Fields Used

• us-gaap:NetIncomeLoss
• us-gaap:ShareBasedCompensation
• us-gaap:PaymentsForRepurchaseOfCommonStock
• us-gaap:PaymentsRelatedToTaxWithholdingForShareBasedCompensation

Earnings Quality Metric

Earnings Quality = Owner's Earnings / Wall Street Earnings

• >80% = Good — SBC cost is reasonable
• 60-80% = Caution — Significant dilution
• <60% = Red Flag — Earnings are inflated

4. The Dilution-Aware Model

Adjusting the GGM for ongoing shareholder dilution

When a company perpetually dilutes shareholders at rate y, we need to adjust the valuation formula. The effective growth of per-share value is reduced.

Burry's Dilution-Aware Formula

PV = CF₁ / [(1+d)(1+y) − (1+g)]

New Variable

y = Annual dilution rate (share count growth)

• Positive y = dilution (shares increasing)
• Negative y = buybacks (shares decreasing)

Key Constraint

(1+d)(1+y) > (1+g)

The combined effect of discount rate and dilution must exceed growth.

Mathematical Derivation

The denominator can be expanded:

(1+d)(1+y) − (1+g) = d + y + dy − g

For small values, this approximates to:

≈ d + y − g

This shows that dilution (y) effectively adds to the discount rate, reducing the present value.

Example Comparison

Same company: CF₁=$5, d=10%, g=3%, but with 2% annual dilution:

Traditional GGM:

$5 / (0.10 - 0.03) = $71.43

Burry Model:

$5 / [(1.10)(1.02) - 1.03] = $5 / 0.092 = $54.35

Haircut: 24% — The dilution-aware value is 24% lower!

5. CAPM Discount Rate

Calculating the required rate of return

The Capital Asset Pricing Model (CAPM) calculates the appropriate discount rate based on the stock's systematic risk (beta).

CAPM Formula

d = Rf + β × (Rm − Rf)

Rf

Risk-free rate (10-year Treasury yield)

β (Beta)

Stock's sensitivity to market movements

Rm − Rf

Market risk premium (~5-7% historically)

Example

With Rf=4.5%, β=1.2, and market premium=5.5%:

d = 4.5% + 1.2 × 5.5% = 4.5% + 6.6% = 11.1%

6. Interpreting Results

How to use the valuation output

Valuation Haircut

The percentage difference between Traditional GGM and Burry's model. A larger haircut indicates more significant dilution impact.

• 0-10%: Minimal dilution impact
• 10-25%: Moderate dilution
• 25%+: Significant dilution concern

Upside/Downside

Compare fair value to current market price:

• Positive: Stock may be undervalued
• Negative: Stock may be overvalued

Important Caveats

• Models assume perpetual growth—real companies don't grow forever
• Historical dilution may not predict future dilution
• Growth rate estimates are inherently uncertain
• This is one input among many for investment decisions

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