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I had a look at Amazon last year and was put off by the Share Based Compensation. Today I looked at Uber. 23 times Growing fast. Network effects. Potential threat from autonomous vehicles. Until you look at SBC and realise the FCF after SBC is actually ZERO.

We are extremely fortunate to own Berkshire Hathaway. Not only is it a growth company, (by virtue of it’s recycling of cash flows into a wide range of investments over time + organic growth from a range of niches) but the boss works for free and he does not pay himself and the staff in options and then try to hide it, in his financial reporting and communications with partners/shareholders.

I really think Wall Street has lost the plot with big tech SBC…

Great point/observation. May not be the case but I would argue that because BRK's management is not taking/stealing shareholder equity via options the stock should ALWAYS sell at a premium to the market.

This article at epsilon theory from a few years ago is a great read:

https://archive.is/20221109195306/https://www.epsi...

In short, over the past decade Apple returned about 90% of free cash flow to investors through stock buybacks and dividends ($600 billion worth) with 10% "sterilizing" SBC, whereas Google and Meta are more or less sterilizing SBC, so nothing being returned to investors.

So don't always believe the talking point about returning money to shareholders through buybacks.

Well, they did, it's just you're not a shareholder.

Thats a really good article comparing the mendacity of Google and Meta’s sterilization buybacks to Apple’s shareholder-focused buybacks.

Thanks!

Thanks for the link and replies there...interesting that Apple makes the 'good list' and Buffett owns it and not the others.

For the record, my statement "23 times....FCF after SBC is actually ZERO." is incorrect. I copied the wrong line into my analysis and then jumped to a confirmation bias! I was too keen to end my Uber investigation and get back to a different company. Apologies to any Uber holders. Hopefully none here.

What I should have said, was that Uber is currently trading at 23 times 2024 FCF, which increases to 31 times after SBC. A significant jump but nothing like as dramatic, as my FCF after SBC is actually ZERO statement. Actually, the earning growth Uber is achieving, makes the 31 multiple quite a bit more reasonable and I should probably continue looking into the firm...

By the way, I don't judge executives at big tech for paying themselves very well. After all, they are are doing all the work and the competition for the best software talent is fierce. Or at least it was. I heard recently that it has cooled quite a bit after the 2022 tech sell off and the maybe the introduction of AI to do coding changes things a little. I like many other, just don't like the references to FCF without any recognition of SBC.

I've toyed with the idea of introducing a shareholder proposal at Amazon (not thinking it would pass, but to pressure them and minimally consider their path ahead). This would be part of it, and another would be to sack Keith Alexander from the board - former NSA director who founded IronNet cybersecurity, which promptly fell apart a few years later but in the meanwhile he sold at the top to the tune of I believe over $5m, was investigated by the SEC, and was tossed as part of the terms and conditions for IronNet's buyout after they went bankrupt and were delisted. Why is this someone who merits *any* board membership?

Great post! It's one of the most important delighters of owning BRK.

The irony with SBC is that it is supposed to align management behaviors with shareholders interests. As you describe it correctly, the opposite happens. It is simply another case of "Other-peoples-money" but actually it ends up as stealing from shareholders. Just think for a minute about something Buffett and Munger have said in the past. Just give the managers an equivalent cash bonus and see if they will buy the stock with that money. They don't and shareholders who are buying should ask "why not?"

Bringing it back home,I have been watching but am a little underwhelmed by the stock purchases by the Berkshire board over the past decade. Ownership is a largely a "hold" thing, to be understood somewhat with the 80- and 90- year olds and "already rich". I just would love to see more insider buying happen. Perhaps that is what is behind adding folks like Chris Davis and Weitz to the board.

This will be a good question for Warren. And love to see Greg chime in. This issue is a true acid test.

Still reading the Bloomstran Semper Augustus letter which is excellent. On p.115, it outlines how the S&P has spent as a whole over half its cash flow on buybacks without denting the share count because of the expensive SBC. Nuts! BRK has retired 12.6% of its shares since 2018 spending a much smaller % of its investable cash flow with Zero SBC. Thank you, Warren!!!

On p.115, it outlines how the S&P has spent as a whole over half its cash flow on buybacks without denting the share count because of the expensive SBC. Nuts!


The irony is that these companies that most heavily use stock based compensation are actually among the most profitable companies. They are not spending their profits on SBC, that's not how the accounting works. They are spending a considerable part of their cash flow on SBC, yes, but since that spending is expensed, the earnings they report is what is left over AFTER all the compensation expense. To say it another way, companies that choose to remunerate their employees with cash AND SBC still end up doing quite well.As an example, Alphabet had $350b in revenues last year, $125b in cash flow, $22b in SBC (!) and $100b in GAAP net earnings. (I love a company with a round number like that: their market cap is $2.1t, so they are trading at 21 times earnings...)

You can't say they made $100b and then used $22b of that to sterilize share issuance - that would be double counting. You could say they got $350b in revenue, used whatever it is, say $200b in salaries and another $22b in SBC, and some other expenses, and ended up with earnings of $100b. Whether it would have been better to spend $222b in salaries and $0b in SBC or to have 10% of the salaries as SBC is another question, but as a shareholder, I still get my $100b, and I don't begrudge the employees getting paid $222b one way or another.

dtb

Yes dtb, I once did a deep dive into Amazon's SBC proceeds from stock option exercising. To the degree the stock price is "expensive" then SBC is even more powerful as the incoming cash as to business size gets shockingly astounding.

...and of course the employee pays tax on exercising while it rids the corporation of an equal amount of tax. The relative numbers are incredible in some instances.

In the late 1990's Ciscos SBC proceeds some quarters exceeded sales as I recall.

...and of course the employee pays tax on exercising while it rids the corporation of an equal amount

this is true, as long as the company is not paying the employee's tax on the stock compensation, which it sometimes does. Otherwise, if you make $200,000 in salary and $100,000 in SBC, but you have the stock (and are often restricted from selling it) but you have to pay tax on that $100,000 out of your salary.

However, this too would be counted as compensation costs in the income statement, so it's already baked in, if the company is covering those taxes.

dtb

" but you have the stock (and are often restricted from selling it) but you have to pay tax on that $100,000 out of your salary."

I had a lot of SBC over more than 20 years at a large tech company. Upon vesting and exercise, the Broker just withholds the equivalent number of shares to satisfy the estimated tax.

Applied to my RSUs, PSUs, and all options.

Curious as a lot of us have never received SBC- what % of your total comp was in the form of SBC during your last decade of employment there? Was this in line with your personal preference of compensation as well? Thanks in advance.

I had a lot of SBC over more than 20 years at a large tech company. Upon vesting and exercise, the Broker just withholds the equivalent number of shares to satisfy the estimated tax.

That is the typical way they do it. But it isn't the only way. There were a few times that I opted to pay the taxes with cash instead of with shares. One time, maybe 15-20 years ago, my company was hard up for cash, so they gave us stock in lieu of bonus that year. At the time, the stock was really low due to the imminent threat of bankruptcy. So they ended up giving us LOTS of shares. Instead of selling those "cheap" shares, I opted to keep them and pay the tax using my own cash. Turned out to be a great decision because the company avoided bankruptcy, got some last minute financing, and those shares were worth 10 to 15X when I finally sold them sometime later after the company was on much firmer financial footing.

Options obviously had the most leverage. Was great mid 90s to March 2000.

PSUs depend on performance metrics (hence the Ps) so that varies by company and year to year. Many years our PSU score was high enough to offset the tax.

RSUs totally depend on how much your firm wants to retain you. There are special grants and routine annual grants which vested over 4 years.

SBC can be multiples of salary.

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