Global Valuation, Accounting & Tax: The State of Stock-Based Compensation

Research evidence excerpt

Global Valuation, Accounting & Tax: The State of Stock-Based Compensation

FoundationMinto this topic in greater detail.

Exhibit 1: AI Enablers: SBC Growth vs. Total Headcount Growth

2018 2019 2020 2021 2022 2023 2024 2025

ORCL SBC GOOGL SBC MSFT SBC NVDA SBC META SBC AVGO SBC

ORCL Headcount GOOGL Headcount MSFT Headcount NVDA Headcount META Headcount AVGO Headcount

Note: AVGO's SBC excludes $1.4 billion of expense related to its VMware acquisition.

Source: Company filings, FactSet, and Morgan Stanley Research.

Hidden dilution? For reported EPS, SBC is dilutive to the extent awards are in-the-

money and earnings are positive. Investors may under-appreciate potential dilution

as many new public equity entrants are unprofitable and/or adjust earnings by

adding back SBC. Prominent market data vendors also often exclude dilutive SBC

shares from market cap estimates.

We estimate ~38% of Russell 3000 companies are trading below their average

stock or option grant values. Household & Personal Products, Food Beverage &

Tobacco, Software & Services, and Commercial & Professional Services have the

largest percentage of out-of-the-money awards. Many of these awards may not

appear in diluted share counts if anti-dilutive, artificially propping EPS up.

GAAP requires companies to expense SBC, however more companies add the

expense back to non-GAAP income because of SBC's non-cash nature. We find ~54%

of Technology companies add back SBC to non-GAAP/headline earnings. These

companies make up ~32% of the Russell 3000's market capitalization.

Hot button valuation topics: Stock-based compensation is a real economic and

operating cost. When valuing a company, we suggest incorporating both past grants

in diluted shares and burdening earnings expectations for future grants. A company