After a review of Facebook Inc (NASDAQ:FB)’s recent SEC filing, it will take until the middle of next year for the company to earn operating income to offset its $2.3 billion stock-compensation costs.
This is based on Facebook Inc (NASDAQ:FB)’s current profitability level, reported John Shinal of MarketWatch.
Canyon Profits On Covid Crisis Refinancings
Canyon Partners' Canyon Balanced Funds returned -0.91% in October, net of fees and expenses, bringing the year-to-date return to -13.01%. However, according to a copy of the firm's investor correspondence, which ValueWalk has been able to review, the fund quickly bounced back in November, adding 7.3% for the month. Net of fees, the letter reported, Read More
Because of this, the company’s shares will have less appeal as a value and growth growth stock for fund managers and professional equity investors.
This large stock-compensation bill, explained Shinal, exemplifies the generosity by Facebook Inc (NASDAQ:FB) to its common shareholders, including employees, executives, and early investors who received the stock. As for any net income the company could have had in the immediate future, it was given away as free equity to these shareholders.
But there’s more.
With new stock-compensation charges and related taxes coming on Jan. 1, in addition to the current total, Facebook’s per-share earnings could be decimated by the costs past 2013.
In Facebook Inc (NASDAQ:FB)’s third earnings, it showed a preview of this action. For insiders with the opportunity to sell their positions, a large number had been sold, resulting in large corporate expenses.
For the quarter, the company’s operating income dropped 9% to $377 million. This came from rising expenses, such as $179 million in stock-compensation costs. In addition, a $431 million tax charge for stock compensation in the quarter had Facebook losing 2 cents per share; this compares to a 10 cent profit in the previous year.
Combined, these compensation charges and related taxes in the quarter had cost Facebook almost 20 cents a share, net of a tiny, related tax benefit.
Keep in mind that either every time an insider sells or the company issues new stock to pay for part or all of an acquisition (see the Instagram purchase), Facebook’s compensation bill increases.
But Shinal points out the biggest problem for Facebook’s common stock holders: the company has a huge amount of outstanding shares. It has twice the amount of either Apple Inc. (NASDAQ: AAPL) or International Business Machines Corp. (NYSE:IBM).
There’s more. Facebook Inc (NASDAQ:FB) has over six times the amount that Google Inc. (NASDAQ:GOOG) has. In the technology sector, only Microsoft Corporation (NASDAQ:MSFT), Cisco Systems, Inc. (NASDAQ:CSCO), Intel Corporation (NASDAQ:INTC), and Oracle Corporation (NASDAQ:ORCL) have greater diluted common stock.
Factor in Facebook Inc (NASDAQ:FB) Chief Executive Mark Zuckerberg’s personal equity and what either his employees or pre-IPO investors, such as Goldman Sachs (NYSELGS), have sold and this has further diluted the shares for retail investors. Remember, the Facebook IPO was large, further contributing to the number of shares.
When insiders and employees sell their restricted stock, Facebook then incurs more expenses and a portion of the taxes owed from the sales. Just this week, an additional 800 million Facebook shares will be available to sell.
As previously noted, in its recent filing, the company’s $2.3 billion in outstanding compensation costs will be acknowledged for a three-year-period, at an average of $767 million annually.
From Facebook’s third quarter earned operating income at $377 million, the company will need a little more than two quarters of operations to pay for its current stock-compensation costs, noted Shinal.
In addition, keep in mind this is a hypothetical story. Facebook could pull back on its spending and trade some growth for greater operating margins. But with comments by Zuckerberg, this isn’t likely, as last quarter’s operating expenses rose twice as quickly as its revenue.
Without spending cuts, Facebook Inc (NASDAQ:FB) investors will see these compensation charges quarterly for the following three years, as the company whittles its $2.3 billion stock-compensation cost down. They will make it a challenge for Facebook to create net income.
For the year-to-date, Facebook Inc (NASDAQ:FB)’s stock is down 47.18%.