SBC is a hot-button issue in the cloud world today. Part 2 of this series covers a discussion on: valuation implications of SBC and managing SBC impact.
Humbled to be mentioned in this outstanding article. Thank you Janelle!
Buy-backing shares to offset dilution is not necessarily bad if done at a price well below the intrinsic value. However the adverse incentive to keep purchasing also at irrational prices is a real risk. I would value case by case.
"large cap SaaS companies are spending a sizeable portion (30%) of their cash flow on share repurchases but shares outstanding are still rising (+7%)" = insane.
Stock dilutive overhang and its adverse impact, if overdone, has been a major part of my due diligence for 20+ years.
It would be awesome to see a general market analysis on this in the other direction - public companies that grow, earn, and do NOT overdo SBC and its dilutive effect.
The concentration and analysis you've done on saas and AI stocks is a wonderful start.
Here is a screen by two brothers of the Indian stock market looking for "growth without dilution" which may be simple and overlook buybacks above intrinsic value, but it is still wonderful:
Would you know of any analysis or screen like this of the U.S. market? It would be an awesome start, to find companies that limit dilution, generally, as your saas/ai graph does for that specific industry.
Great work Janelle. From am issuer perspective, does it trigger a tax event when options are exercised and company receives cash from conversion into shares? (I am assuming it is NOT a cashless exercise). Thank you
Love your work, thanks for making me smarter.
Humbled to be mentioned in this outstanding article. Thank you Janelle!
Buy-backing shares to offset dilution is not necessarily bad if done at a price well below the intrinsic value. However the adverse incentive to keep purchasing also at irrational prices is a real risk. I would value case by case.
"large cap SaaS companies are spending a sizeable portion (30%) of their cash flow on share repurchases but shares outstanding are still rising (+7%)" = insane.
Janelle:
Incredible analysis in part I and part Ii.
Stock dilutive overhang and its adverse impact, if overdone, has been a major part of my due diligence for 20+ years.
It would be awesome to see a general market analysis on this in the other direction - public companies that grow, earn, and do NOT overdo SBC and its dilutive effect.
The concentration and analysis you've done on saas and AI stocks is a wonderful start.
Here is a screen by two brothers of the Indian stock market looking for "growth without dilution" which may be simple and overlook buybacks above intrinsic value, but it is still wonderful:
https://www.screener.in/screens/226712/growth-without-dilution/
Would you know of any analysis or screen like this of the U.S. market? It would be an awesome start, to find companies that limit dilution, generally, as your saas/ai graph does for that specific industry.
DP
Great article! Any insights on SBC and it’s correlation to layoffs?
Great work Janelle. From am issuer perspective, does it trigger a tax event when options are exercised and company receives cash from conversion into shares? (I am assuming it is NOT a cashless exercise). Thank you
Great question, I'm not an expert on this specific topic but this article from PWC might help: https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/income_taxes/income_taxes__16_US/chapter_17_income_ta_US/172_basics_of_accoun_US.html