Value Investor Killer - Stock Based Compensation

TL;DR

Stock-based compensation can significantly affect the fair value of stocks and thus impact shareholders, but companies like Google that actively repurchase shares can mitigate this impact.

Transcript

hi I'm Jimmy in this video we're looking at stock based compensation and how much does it hurt shareholders how it could affect a discounted cash flow or ultimately the fair value of stocks we're going to use Google as our example in this video but this would work just as well for companies like uh apple or Amazon really a lot of tech companies use... Read More

Key Insights

• 🧚 Stock-based compensation can significantly lower a company's fair value by increasing the number of shares outstanding.
• ⚾ The accounting of stock-based compensation is spread out over multiple years based on vesting periods, affecting different expense categories.
• 🥶 Stock-based compensation is not a cash expense and is added back in the calculation of free cash flow.
• ⚾ Companies that actively engage in stock buybacks can offset the impact of stock-based compensation on shareholder value.

Questions & Answers

Q: How does stock-based compensation affect the fair value of stocks?

Stock-based compensation can lower the fair value of stocks by increasing the number of shares outstanding, thereby diluting the ownership of existing shareholders.

Q: How is stock-based compensation accounted for in financial statements?

Stock-based compensation is spread out over several years and affects expense categories based on the employees' departments. It is not a cash expense and is added back in the calculation of free cash flow.

Q: How do stock buybacks offset the impact of stock-based compensation?

Companies like Google engage in stock buybacks to repurchase shares, which helps counterbalance the dilutive effect of stock-based compensation, positively impacting the fair value of the stock.

Q: What factors determine the impact of stock-based compensation on shareholders?

The amount of stock-based compensation and whether the company is actively repurchasing shares are crucial factors in determining the impact on shareholders. Companies that issue excessive shares without buying back can negatively affect shareholder value.

Summary & Key Takeaways

• Stock-based compensation can lower the fair value of a company's stock if it results in an increase in the number of shares outstanding.

• Google is used as an example to illustrate the magnitude of stock-based compensation in tech companies.

• The accounting of stock-based compensation is spread out over several years, affecting different expense categories on the income statement.

• Stock-based compensation is not a cash expense and is, therefore, added back in the calculation of free cash flow.

• Google's stock buybacks help offset the impact of stock-based compensation on the fair value of the stock.