Would be great to rank these by stock based comp abuse. It is the most abused aspect of corporate finance and the US tech sector is the worst offender. It's a de-facto tax on shareholders levied by insiders, on top of their already very generous pay packages. It acts as a huge drag on total shareholder returns and it also introduces huge distortions to share prices as companies seek to disguise the dilution by buying stock in vast quantities at any price, stretching the market cap far from economic reality based on fundamentals. Through this lens, some of these companies are just ticking time bombs waiting for the next dot-com correction. I welcome your views.
It is a problem James - but a tough one to resolve.
These companies are at the forefront of new cloud innovations. They are competing for the best talent in a fairly limited pool. They need to pay their top talent a lot to keep them. They're all supplementing the cash comp with good Stock Based Comp, so they all need to continue. If one decides not to, they will have to pay cash instead. Market won't like the big drop in Free Cash Flow (even though there'll be less future dilution for shareholders). So what do they do? Who moves to cash comp first? It seems they're stuck in this situation.
Importantly, their people are their most important asset, so they don't want to risk losing them.
They've dug themselves so deep into a hole that they can't find their way back out. It's greed.
But as Charlie Munger used to say, 'if you find yourself in a hole, stop digging!'
This is where the regulator needs to step in, but the SEC has been asleep at the wheel.
Do I want to invest in a company that taxes me to enrich insiders?
It doesn't matter that it has the right tech - it won't be a good investment.
Look at Twitter. Right model in the right place at the right time, just as social media took off. But its IPO price was ~$45 and it went private at about the same price a decade later. It never paid a dividend, so shareholders had a miserable decade. Zero return. Negative returns in real terms accounting for inflation. Can you guess what happened to Jack Dorsey, its CEO? He took his wealth over the same period from zero to $4.5billion. He was taxing shareholders through SBC.
Still want to invest in these tech companies with corrupt management focused only on enriching themselves?
I avoid any company with egregious SBC. No room for negotiation. Either the management are aligned with shareholders (Buffett style) or they are not. If they're aligned I'll invest, if not I'll take my capital elsewhere.
I agree with what you are saying James - too much SBC is not good.
All I am saying is that they're not ALL corrupt - I think this is a problem that they face. They're now in it. How do you suggest they get out of it?
The first one to move to cash comp only will likely pay their employees a total comp that is a lot less. And they'll probably lose a lot of people. The best will likely get lured to others with big Stock comp.
That's why I say as a group many of them are stuck.
Not sure how it gets resolved - unless there's a major flush.
You and I are free to invest our capital wherever we want. We are not forced to invest in these types of companies. That's what makes the market.
I think its a myth that people would leave. If you were an IT developer, you would want to be surrounded by great people and work at a market leader. Working at Microsoft or Google is great on anyone's resume, but more than that, it is the perfect place to learn from others. Google has been voted best place to work many times - so if you were there, earning a great salary with loads of benefits, would you really leave over stock based comp to work someplace else that isn't so good?
In any event, many surveys have revealed that if you give employees the choice of cash and SBC, they would take the cash every time.
Apple and Google are sitting on a mountain of cash, they don't need SBC, they could just up people's salary. The reason that they don't is because shareholders would be shocked at how much people are being paid. With SBC they can pretend its a non-cash expense and conceal it through egregious buybacks which shareholders seem not to notice.
You need a great company run by honest management. SBC is not the sign of honest management.
You know its origins was for bootstrapped startups with insufficient cash to pay competitive salaries - sweat equity - but US tech companies are neither cash strapped nor are they struggling to pay competitive salaries.
Did you know that Apple's top and bottom line have flatlined for two years, meanwhile its share price doubled. Why? The company were using corporate capital to pump the stock through overpriced buybacks to offset dilution caused by SBC. When the share price becomes so dislocated from underlying fundamentals, do you expect it to end well?
Why do you think Buffett dumped most of his Apple stock. It's become a bubble.
Food for thought, but please don't make excuses for these companies. Their behaviour is inexcusable.
My comments in my two posts above are referring to the high growth next Generation companies, not the giants. I am referring to the companies in Jamin Ball's cloud software analysis, not the giants like Google and Microsoft.
Google, Microsoft and Apple have SBC/Rev of 6%, 4% and 3% respectively (Last twelve months). This is not as much of a problem as with the higher growth smaller software companies such as Zscaler, Snowflake and SentinelOne for example. Those sorts of companies have SBC/Rev in the 20-30% range and higher. Their FCF margins after deducting SBC are often negative. And their share counts are rising fast.
I agree with you that in the case of Google, MSFT and Apple, they could pay their employees less Stock Based Comp and they have the advantage of their employees wanting to work there, so many wouldn't leave. And they have mountains of cash to compensate (even partially) with cash.
But those aren't the companies I am referring to, neither is Jamin Ball in his analysis. I am referring to these higher growth smaller next gen companies. I don't know how it got to this point, perhaps a remnant of earlier days with "sweat equity" when they didn't have the cash. Those companies depend more heavily on top talent because they have an order of magnitude smaller staff count.
Let's see how it evolves. I'd like to see the Stock Based Comp reduce over time.
In any event, they are growing fast so the counter argument is that the winners in this higher growth cohort will still provide good investment returns over the coming 5 years, despite the high use of stock based comp. The losers (probably most of them) will likely end up in big losses for shareholders.
I am not making excuses for the giants - but in the case of the smaller high growth companies, was just pointing out that if they're all doing it, how does it get resolved? Do regulators have to step in to limit the use of SBC?
The combination of public company data with benchmarks you’ve developed through private market experience makes this especially valuable. I appreciated the clarity around metrics like gross margin adjusted CAC payback and net revenue retention — these are often discussed but rarely explained so thoroughly.
Would be great to rank these by stock based comp abuse. It is the most abused aspect of corporate finance and the US tech sector is the worst offender. It's a de-facto tax on shareholders levied by insiders, on top of their already very generous pay packages. It acts as a huge drag on total shareholder returns and it also introduces huge distortions to share prices as companies seek to disguise the dilution by buying stock in vast quantities at any price, stretching the market cap far from economic reality based on fundamentals. Through this lens, some of these companies are just ticking time bombs waiting for the next dot-com correction. I welcome your views.
It is a problem James - but a tough one to resolve.
These companies are at the forefront of new cloud innovations. They are competing for the best talent in a fairly limited pool. They need to pay their top talent a lot to keep them. They're all supplementing the cash comp with good Stock Based Comp, so they all need to continue. If one decides not to, they will have to pay cash instead. Market won't like the big drop in Free Cash Flow (even though there'll be less future dilution for shareholders). So what do they do? Who moves to cash comp first? It seems they're stuck in this situation.
Importantly, their people are their most important asset, so they don't want to risk losing them.
They've dug themselves so deep into a hole that they can't find their way back out. It's greed.
But as Charlie Munger used to say, 'if you find yourself in a hole, stop digging!'
This is where the regulator needs to step in, but the SEC has been asleep at the wheel.
Do I want to invest in a company that taxes me to enrich insiders?
It doesn't matter that it has the right tech - it won't be a good investment.
Look at Twitter. Right model in the right place at the right time, just as social media took off. But its IPO price was ~$45 and it went private at about the same price a decade later. It never paid a dividend, so shareholders had a miserable decade. Zero return. Negative returns in real terms accounting for inflation. Can you guess what happened to Jack Dorsey, its CEO? He took his wealth over the same period from zero to $4.5billion. He was taxing shareholders through SBC.
Still want to invest in these tech companies with corrupt management focused only on enriching themselves?
I avoid any company with egregious SBC. No room for negotiation. Either the management are aligned with shareholders (Buffett style) or they are not. If they're aligned I'll invest, if not I'll take my capital elsewhere.
I agree with what you are saying James - too much SBC is not good.
All I am saying is that they're not ALL corrupt - I think this is a problem that they face. They're now in it. How do you suggest they get out of it?
The first one to move to cash comp only will likely pay their employees a total comp that is a lot less. And they'll probably lose a lot of people. The best will likely get lured to others with big Stock comp.
That's why I say as a group many of them are stuck.
Not sure how it gets resolved - unless there's a major flush.
You and I are free to invest our capital wherever we want. We are not forced to invest in these types of companies. That's what makes the market.
I think its a myth that people would leave. If you were an IT developer, you would want to be surrounded by great people and work at a market leader. Working at Microsoft or Google is great on anyone's resume, but more than that, it is the perfect place to learn from others. Google has been voted best place to work many times - so if you were there, earning a great salary with loads of benefits, would you really leave over stock based comp to work someplace else that isn't so good?
In any event, many surveys have revealed that if you give employees the choice of cash and SBC, they would take the cash every time.
Apple and Google are sitting on a mountain of cash, they don't need SBC, they could just up people's salary. The reason that they don't is because shareholders would be shocked at how much people are being paid. With SBC they can pretend its a non-cash expense and conceal it through egregious buybacks which shareholders seem not to notice.
You need a great company run by honest management. SBC is not the sign of honest management.
You know its origins was for bootstrapped startups with insufficient cash to pay competitive salaries - sweat equity - but US tech companies are neither cash strapped nor are they struggling to pay competitive salaries.
Did you know that Apple's top and bottom line have flatlined for two years, meanwhile its share price doubled. Why? The company were using corporate capital to pump the stock through overpriced buybacks to offset dilution caused by SBC. When the share price becomes so dislocated from underlying fundamentals, do you expect it to end well?
Why do you think Buffett dumped most of his Apple stock. It's become a bubble.
Food for thought, but please don't make excuses for these companies. Their behaviour is inexcusable.
Thanks for the feedback James
I agree that excessive SBC is not good.
My comments in my two posts above are referring to the high growth next Generation companies, not the giants. I am referring to the companies in Jamin Ball's cloud software analysis, not the giants like Google and Microsoft.
Google, Microsoft and Apple have SBC/Rev of 6%, 4% and 3% respectively (Last twelve months). This is not as much of a problem as with the higher growth smaller software companies such as Zscaler, Snowflake and SentinelOne for example. Those sorts of companies have SBC/Rev in the 20-30% range and higher. Their FCF margins after deducting SBC are often negative. And their share counts are rising fast.
I agree with you that in the case of Google, MSFT and Apple, they could pay their employees less Stock Based Comp and they have the advantage of their employees wanting to work there, so many wouldn't leave. And they have mountains of cash to compensate (even partially) with cash.
But those aren't the companies I am referring to, neither is Jamin Ball in his analysis. I am referring to these higher growth smaller next gen companies. I don't know how it got to this point, perhaps a remnant of earlier days with "sweat equity" when they didn't have the cash. Those companies depend more heavily on top talent because they have an order of magnitude smaller staff count.
Let's see how it evolves. I'd like to see the Stock Based Comp reduce over time.
In any event, they are growing fast so the counter argument is that the winners in this higher growth cohort will still provide good investment returns over the coming 5 years, despite the high use of stock based comp. The losers (probably most of them) will likely end up in big losses for shareholders.
I am not making excuses for the giants - but in the case of the smaller high growth companies, was just pointing out that if they're all doing it, how does it get resolved? Do regulators have to step in to limit the use of SBC?
The combination of public company data with benchmarks you’ve developed through private market experience makes this especially valuable. I appreciated the clarity around metrics like gross margin adjusted CAC payback and net revenue retention — these are often discussed but rarely explained so thoroughly.
Super, as always Jamin Ball!
Very insightful as always. Thanks