Snap Stock Investors Have Suffered While Employees Have Scored with Stock Grants

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Snapchat app on smartphone.

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Gabby Jones / Bloomberg

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Long-term investors in Snap Chat’s parent haven’t fared well, with Snap stock now trading well below its 2017 initial public offering price.

Snap (ticker: Snap) employees, however, have done better thanks to a large amount of stock compensation, which has prompted the company’s shares to be outstanding and diluted shareholders.

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Snap stock is down 39.6% at $13.58 Tuesday, its revenue before interest, taxes, depreciation and amortization (Ebitda) and adjusted earnings before interest, taxes, depreciation and amortization (Ebitda) for the current quarter are below the low end of prior guidance, the company said in a regulatory filing late Monday. Will be ,

The stock is now trading below its March 2017 IPO price of $17, and is down more than 80% from its September peak of $83.

Like many tech companies, Snap issues a lot of stock compensation—mostly in the form of restricted stock units—to employees. Snap’s stock compensation last year was $1.1 billion, averaging about $200,000 per employee for more than 5,600 employees. Stock compensation was up 44% in 2021.

Stock compensation in technology firms is now attracting more investor attention because it is an increasing expense, and many firms are unprofitable following heavy stock-compensation costs. Companies also face pressure to issue more stock to employees to compensate for declining stock prices that reduce the value of existing stock grants. Employees often treat compensation shares as part of their wages, and they are vested in their grants as cash, often through automated plans.

Snap declined to comment specifically on its stock-compensation practices. on that First Quarter Earnings Conference CallSnap’s Chief Financial Officer Derek Anderson said: “While we continue to grow our team and leverage stock-based compensation strategically to foster an ownership culture and foster long-term retention, we continue to support these programs. focused on managing responsibly.” Employee stock awards declined in half year-over-year to 1.3% in the first quarter.

With significant stock compensation since its IPO, Snap’s share count has grown from 1.2 billion to more than 1.6 billion.

Snap isn’t profitable based on GAAP accounting (generally accepted accounting principles) like many of its peers, which require stock compensation to be recorded as an expense. Snap lost $359 million, or 22 cents per share, in the first quarter based on GAAP accounting.

And like many technology companies, Snap encourages investors to favor stock compensation when calculating earnings per share and EBITDA — a practice that many investors consider questionable. Snap Back gives several reasons for adding a stock comp.

It notes in its first-quarter earnings release that its non-GAAP results “help us identify underlying trends in our business that could otherwise be affected by the impact of expenses that we exclude in measurement.”

It also states that non-GAAP results “help investors view our financial performance from the perspective of management, and because we believe these measures provide investors with an overview of our core financial performance over a number of periods with other companies.” provide an additional tool to use in comparing our industry.” Outside of the tech world, it’s rare to find companies engaging in this practice.

Critics such as Berkshire Hathaway (BRKB) CEO Warren Buffett scoff at these arguments and argue that the stock is a real expense.

“To say ‘stock-based compensation’ isn’t an expense is even more cavalier. CEOs who go down that path are, in fact, saying to shareholders, ‘If you want me to buy a bundle of options or restricted stock,’ pay, don’t worry about its impact on earnings. I’ll “adjust” it,” Buffett noted in his 2016 Annual Shareholder Letter,

“If CEOs want to omit stock-based compensation in reporting earnings, they need to confirm one of two propositions to their bosses: Why not cost items of value used to pay employees? or why payroll costs should be excluded when calculating earnings,” Buffett continued.

Write to Andrew Berry at [email protected]

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