Many growth companies choose to compensate their employees via a mixture of cash and newly issued shares of their common stock. The value of the stock issued to employees in place of cash is expensed and frequently causes the company to report “low” levels of earnings under GAAP accounting. However, a company often discloses a companion (company-friendly) “adjusted EBITDA” figure, whereby the share-based compensation line item is added back to operating earnings plus depreciation to create a pro forma operating cash flow scenario which assumes no stock issuance was made to workers.
In bull markets, investors often accept “adjusted EBITDA” as an indication of a company’s cash flow capabilities and do not ask many questions about how the measure is computed. In other words, they are willing to ignore the huge amount of stock-based compensation many start-up companies hand out to employees in place of cash compensation.
However, during markets where optimism is a scarce commodity (such as in 2022), investors emphatically reject valuing companies based on adjusted EBITDA, particularly in cases where the stock-based compensation add-back is quite large (and, in most cases, unjustified).
The table below lists key financial parameters of five high-valuation, early stage growth companies: the fintech players Coinbase Global, Inc. (NASDAQ: COIN) and Robinhood Markets, Inc. (NASDAQ: HOOD); electric vehicle developers Lucid Group, Inc. (NASDAQ: LCID) and Rivian Automotive, Inc. (NASDAQ: RIVN); and Zoom Video Communications, Inc. (NASDAQ: ZM), perhaps the poster child of pandemic, stay-at-home stocks.
Key Financial and Operating Statistics of Selected High-Valuation Growth Companies
| (in millions of U.S. dollars) | COINBASE | ROBINHOOD | LUCID | RIVIAN | ZOOM VIDEO* |
| Revenue in Quarter Ended September 30, 2022 | $590.3 | $361.0 | $195.5 | $536.0 | $1,101.9 |
| Adjusted EBITDA in Quarter Ended September 30, 2022 | ($115.9) | $47.0 | ($552.9) | ($1,307.0) | $164.5 |
| Stock-Based Compensation in Quarter Ended September 30, 2022 | $391.4 | $110.0 | $83.2 | $293.0 | $302.8 |
| as a % of Revenue | 66.3% | 30.5% | 42.6% | 54.7% | 27.5% |
| as a % of Adjusted EBITDA | NM | 234.0% | NM | NM | 184.1% |
| Adjusted EBITDA in Quarter Ended September 30, 2022 WITHOUT Share-Based Compensation Add-Back | ($507.3) | ($63.0) | ($636.1) | ($1,600.0) | ($138.3) |
| Revenue in Nine Months Ended September 30, 2022 | $2,543.9 | $978.0 | $350.5 | $995.0 | $3,275.2 |
| Adjusted EBITDA in Nine Months Ended September 30, 2022 | ($247.3) | ($176.0) | ($1,350.8) | ($3,756.0) | $638.1 |
| Stock-Based Compensation in Nine Months Ended September 30, 2022 | $1,135.1 | $494.0 | $352.2 | $852.0 | $767.7 |
| as a % of Revenue | 44.6% | 50.5% | 100.5% | 85.6% | 23.4% |
| as a % of Adjusted EBITDA | NM | NM | NM | NM | 120.3% |
| Adjusted EBITDA in Nine Months Ended September 30, 2022 WITHOUT Share-Based Compensation Add-Back | ($1,382.4) | ($670.0) | ($1,703.0) | ($4,608.0) | ($129.6) |
| Revenue in Twelve Months Ended September 30, 2022 | $5,042.4 | $1,341.0 | $376.9 | $1,049.0 | $4,346.5 |
| Adjusted EBITDA in Twelve Months Ended September 30, 2022 | $957.6 | ($263.0) | ($1,650.3) | ($4,864.0) | $958.4 |
| Stock-Based Compensation in Twelve Months Ended September 30, 2022 | $1,397.6 | $811.8 | $502.8 | $1,422.0 | $929.1 |
| as a % of Revenue | 27.7% | 60.5% | 133.4% | 135.6% | 21.4% |
| as a % of Adjusted EBITDA | 146.0% | NM | NM | NM | 96.9% |
| Adjusted EBITDA in Twelve Months Ended September 30, 2022 WITHOUT Share-Based Compensation Add-Back | ($440.0) | ($1,074.8) | ($2,153.2) | ($6,286.0) | $29.3 |
| Share Price Performance YTD 2022 | -83% | -48% | -74% | -72% | -61% |
*The figures for Zoom Video are for the quarter, nine months, and twelve months ended October 31, 2022.
Remarkably, in the quarter ended September 30, 2022, share-based compensation represented between 27.5% and 66.3% of each of the five companies’ revenues. Stock-based payments to workers accounted for 234% and 184% of Robinhood and Zoom Video’s adjusted EBITDA, respectively, in the 3Q 2022. Similar computations could not be made for Coinbase, Lucid and Rivian because the 3Q 2022 adjusted cash flows for each of those companies were negative.
These same trends held for the companies, perhaps even more pointedly, for the twelve months ended September 30, 2022. Notably, share-based compensation equaled more than 130% of both Lucid and Rivian’s revenue over this period. Only one company, Zoom Video, realized more adjusted EBITDA than stock-based compensation for the year ended September 30, 2022. Even in that case, the differential was tiny — US$958 million versus US$929 million.
Investors were not fooled by the anemic, mostly negative, cash flows generated by the growth companies over the last year, as well as the remarkably large amounts of share-based compensation. The best performer of the five, Robinhood, has lost 48% of its value since December 31, 2021; the worst, Coinbase, has plunged 83% since year-end 2021.
Information for this briefing was found via Edgar and the sources mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
