Twitter’s using a pro forma earnings metric for valuation purposes is seen as “uniquely treacherous” by analysts at Sanford C. Bernstein. The analysts noted that the company’s stock-based compensation is very huge, and this makes it difficult to correctly value the company.
Stock compensation for Twitter is massive
In a research note on Tuesday, the firm’s analysts observed Wall Street’s regular practice of using earnings metrics for Internet companies that do not include stock-based compensation. The research firm said that stock-based compensation is a “relatively underappreciated operating expense,” even when there is nothing innately wrong with using any given metric certainly and consistently.
When doing so, the research firm singled out Twitter, saying that the use of pro-forma earnings for valuation purposes is particularly unreliable. Twitter’s stock-based compensation charge is larger than earnings before interest, depreciation, amortization and taxes. Similar concerns were highlighted during Twitter’s November 2013 initial public offering. Bernstein noted that the metric was 247% of pro forma earnings last year, compared to 46% for Facebook. And this makes it hard to determine Twitter’s valuation.
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