"In particular, if you have a corporation where a man has risen to be CEO, and he now has hundreds of millions of dollars in the stock of the company...
Decades ago, Stock-Based Compensation (SBC) was kept entirely off the Income Statement until Warren Buffett famously called out the absurdity, forcing regulators to mandate its inclusion on the P&L. Having lost that battle under GAAP, Big Tech management adapted by shifting the narrative to a non-GAAP metric: Free Cash Flow (FCF). By relying on standard definitions that automatically add SBC back to Operating Cash Flow, they have effectively resurrected the old illusion.
Given the staggering magnitude of equity grants handed to Big Tech insiders today, ignoring SBC in FCF calculations is not a benign accounting quirk—it is a structural distortion. Excluding a massive, recurring operational cost from cash flow metrics represents a deliberate attempt by management to obfuscate economic reality from the true owners of the business. It is a fundamental governance red flag. At Berkshire Hathaway, where cash compensation is the standard, such accounting games are non-existent; if Berkshire ever utilized equity incentives, management would display the candor to account for them transparently.
The structural hypocrisy deepens when evaluating capital allocation. Management frequently deploys billions in hard cash to repurchase shares—often at or above intrinsic value—for the sole purpose of neutralizing the dilution caused by these very same equity grants. Masking an escalating share count by burning cash on non-accretive buybacks is a egregious transfer of value from external shareholders to insiders.
In a buoyant market driven by promotional narratives and momentum-driven participants, these structural flaws are easily ignored. The prevailing consensus treats both SBC and structural CapEx as flexible variables that can be adjusted away to justify higher valuations. Investors who accept these inflated, management-adjusted figures without haircutting the cash flows or modeling the inevitable dilution are simply deluding themselves.
Decades ago, Stock-Based Compensation (SBC) was kept entirely off the Income Statement until Warren Buffett famously called out the absurdity, forcing regulators to mandate its inclusion on the P&L. Having lost that battle under GAAP, Big Tech management adapted by shifting the narrative to a non-GAAP metric: Free Cash Flow (FCF). By relying on standard definitions that automatically add SBC back to Operating Cash Flow, they have effectively resurrected the old illusion.
Given the staggering magnitude of equity grants handed to Big Tech insiders today, ignoring SBC in FCF calculations is not a benign accounting quirk—it is a structural distortion. Excluding a massive, recurring operational cost from cash flow metrics represents a deliberate attempt by management to obfuscate economic reality from the true owners of the business. It is a fundamental governance red flag. At Berkshire Hathaway, where cash compensation is the standard, such accounting games are non-existent; if Berkshire ever utilized equity incentives, management would display the candor to account for them transparently.
The structural hypocrisy deepens when evaluating capital allocation. Management frequently deploys billions in hard cash to repurchase shares—often at or above intrinsic value—for the sole purpose of neutralizing the dilution caused by these very same equity grants. Masking an escalating share count by burning cash on non-accretive buybacks is a egregious transfer of value from external shareholders to insiders.
In a buoyant market driven by promotional narratives and momentum-driven participants, these structural flaws are easily ignored. The prevailing consensus treats both SBC and structural CapEx as flexible variables that can be adjusted away to justify higher valuations. Investors who accept these inflated, management-adjusted figures without haircutting the cash flows or modeling the inevitable dilution are simply deluding themselves.
Rant ends.
I agree.