Saul,
I think you said you didn’t worry about stock compensation. But this will definitely bring down EPS when a company reports their GAAP earnings. Now I realize you don’t care about GAAP earnings but they are followed among the analysts. Could you please explain to me your thinking on this? If a company gives out Stock compensation of 10% per year they are seriously diluting the shareholders. Especially if they are not profitable but are cash flow positive.
Thanks Saul,
Andy
<I think you said you didn’t worry about stock compensation. But this will definitely bring down EPS when a company reports their GAAP earnings. Now I realize you don’t care about GAAP earnings but they are followed among the analysts. Could you please explain to me your thinking on this? If a company gives out Stock compensation of 10% per year they are seriously diluting the shareholders.
Andy,
I don’t like excessive stock compensation either, but you have to remember that at most small technology companies, that is most of their compensation as the companies don’t have much money. It also allies their interests with ours if they have options which are only valuable if the price goes up.
I ignore GAAP earnings because the stock-based compensation is already accounted for in diluted shares. More shares reduces earnings per share. Taking it as an expense also double counts it, which is why almost every company that I know of subtracts out the stock based compensation non-cash expense when they figure adjusted earnings or “real earnings”.
By the way, analyst earning estimates are almost always adjusted earnings too, as far as I know. Also if you read the companies’ disclaimers they almost always specify that they use adjusted earnings for their own internal evaluations of how the company is doing. They often give GAAP results as a formality, and then base their entire discussion of results on adjusted results.
Saul
I ignore GAAP earnings because the stock-based compensation is already accounted for in diluted shares. More shares reduces earnings per share. Taking it as an expense also double counts it, which is why almost every company that I know of subtracts out the stock based compensation non-cash expense when they figure adjusted earnings or “real earnings”.
Thanks Saul for your point of view. So if analyst and the companies are using Non-Gaap to follow their progress, who is using Gaap and is it important for the direction of the company? I realize the SEC mandates GAAP to be disclosed but who in investing is following it?
Andy
I realize the SEC mandates GAAP to be disclosed but who in investing is following it?
Some people, even some people on these boards, feel that GAAP is important because companies may try to fudge non-GAAP results. I know, for instance, that Fletch, who is trained as an accountant, follows GAAP (although even he admits that the GAAP rules on repricing warrants every quarter according to the stock price give bizarre values). I think you’d have to say that some accountants like GAAP, while lots of CFO’s don’t. I use adjusted results because they tell you what the real company is doing. And realize that GAAP can sometimes give inflated revenues or earnings, not just lower ones. For example, today’s Pandora results gave them about $15 million extra in GAAP revenue that they didn’t really make this quarter because of the GAAP release of some held back revenue.
Saul