Uday's avatar
$94.9m follower assets
New pet peeve
Pet peeves come and go. Recently I've been increasingly irritated by people questioning the management's competance and ability because the "the SBC as a % of revenue went up on a QoQ basis". I understand its important, but incorporating some metrics because your favourite investor touched upon that in his latest quarterly letter is just laughable.

Having an opinion is totally fine. Everyone has the right. But having the gall to question someone's ability having never run a business yourself, never hired yourself and have no idea what it takes to do hire and retain the best talent. I would think twice and question my reasoning multiple times before publicly declaring someone's incompetant.
Stock Metal Investment's avatar
Well, SBC is an expense and investors should be aware of it. The trend is important though, not just a quarterly uptick. SBC isn't bad, but the way tech companies excessively use it is .
Nathan Worden's avatar
Great point— while there is a level of stock-based-compensation that can be a red flag, it certainly isn't always a red flag (because it is indeed useful in retaining talent.)
Stock Metal Investment's avatar
@nathanworden It is useful, but has to be considered as an expense when researching the fundamentals of a company. I did a grave mistake by ignoring it regarding TDOC https://seekingalpha.com/article/4521285-teladoc-why-i-was-wrong-about-this-stock
Nathan Worden's avatar
@stonkmetal yeah it can be abused for sure— would you say there is an acceptable level of SBC as long as it’s pretty low?
Stock Metal Investment's avatar
@nathanworden The best answer ever: It depends! I view SBC as an expense in the context of free cash flow margin. If FCF margin is still healthy after deducting SBC then I'm fine. There are many examples in the growth space, where all the Free cash flow is eaten away by SBC though. So I hate management talking about their "free cash flow profitability" while issuing more shares than actual FCF.
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Nathan Worden's avatar
@stonkmetal that sounds fair to me— ‘When free cash flow is entirely eaten away by stock based compensation, that seems like an issue’
Uday's avatar
@nathanworden @stonkmetal what if the management ends up losing the talent war just because it wants to win the FCF-SBC battle? Do you as a shareholder want to see that? Agree with what Nathan says, it is not to be abused. And mate if you think FCF-SBC broke your TDOC thesis then something is not right here.
Stock Metal Investment's avatar
@uplusk Like I said: It depends. As long as investors don't ignore it as a cost in their thesis its fine. I ignored it in my TDOC thesis, so it definitely was part of why it broke.

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