Yes, he missed that angle entirely in the video. SBC is primarily a wealth-transferring tool where the investor's money goes into the employee's pockets. When you use the FCF to offset SBC, you can't use the money to return capital to the investors or grow the business.

This guy gets it. meta and goog needs to fall another 50% before I touch them, not because they are not undervalued, but simply because their sbc strategy.

They never returned to shareholders because they were growing at 30-40% a year for a record that no company had ever done in history lol. I don't think any shareholder of Meta is sad for holding the stock the past 10+ years

@@maxjames00077 Since their IPO they 15x net profit and 23x revenue. The stock? Only 5.5x... Yes they are were growing at those rates, but not anymore. All those buybacks have led to nothing as SBC was greater. The risk taken by Meta shareholders is not being rewarded, the employees are taking the benefits without the capital risk. Apple is an example of how it should be done (growing, reinvesting and rewarding shareholders). Meta or even worse, Snap are examples of misconduct towards shareholders.

@@jeroenano5759 5,5? That's what the stock did, but as an investor what the stock does should be irrelevant. Hoping a stock goes up to higher valuations has nothing to do with investing. From IPO you're looking at a 100x growth in FCF if it picks up again to 2021 levels after the 'recession' is over. But the real mistake you make is comparing business in 2 different states. Apple has an amazing ROIC / ROE / ROC. But they don't invest a lot of their money into the business again. Meaning, they make 10 bn, invest 1/3rd of that into the business and make 20-30% on that investment. If they invested all of that money instead of 1/3rd, they wouldn't have made 20-30%. So instead of just reinvesting money at lower returns because they can't grow anymore, they should return it to shareholders, and they do. Apple went public in 1980 or so, and has been growing was slower since let's say 2012 (Apple 2,5x their revenue since then and Meta 23x, HUGE difference). Meta on the other hand, has been growing like crazy until recently and in those years you DON'T use your precious cash to return to shareholders. If you can invest all your cash into the business and still make a 20-30% ROIC (which Meta has) then that's what you do. Now since 2016, Meta has slowly started to enter the position where they could not invest all their cash anymore and make those returns so their cash position grew a lot since then. But they also did slowly start to return to shareholders and their out. shares did decline from that moment. Now they JUST entered the business phase Apple has been in for over a decade already and guess what, they announced 40 bn in buybacks, which is a bigger buyback program compared to Apple in terms of market cap / buybacks yield lol. Long story short, you don't return to shareholders when you can use that cash to achieve 20-40% investment returns on all that cash yourself as a company, you do it when you have entered a state where you simply can't reinvest that into the company anymore because you already are so big that growth is barely possible anymore.

That is my line of reasoning as well. Thanks

Completely agree. I always subtract stock based compensation when doing discounted cash flow

Question: you substract the "stock-based compensation expense" that is in the cash flow statement from the FCF in order to get that "net" FCF?

@@pabloorue777 yes, so that the "final" free cash flow is lower than that reported. This should compensate for the future dilution in shares. In many companies this is irrelevant because stock based compensation is usually quite small, but in some companies this modification is very very significant

No, don't add back SBC

@@6toolbaseball I always subtract SBC from FCF. Google had 60 bn in FCF but almost 20 bn in SBC. Now that 60 bn is FCF but they also diluted us 20 bn by doing so. So they have to do the buybacks for 20 bn to stay even. Which leaves us at 40 bn FCF that could be distributed to shareholders, not 60 bn

It increases FCF relative to net income. So in DCF you want to take stock comp out of the FCF calculation.

But you still need to also account for the dilution

And no off setting buybacks

Technically there is a maximum allowed shares that was set up. Most of the time companies shares outstanding are way under that level. That’s how this is allowed.

They barely bought any shares back at 300. They accelerated share repurchases in 2022

Earnings per share (fully diluted), then.

That's why you subtract the SBC from FCF. For example Google has 60 bn in FCF but did 20 bn in SBC. Remove those 20 bn from the FCF and you get 40 bn in ACTUAL FCF that shareholders gained that year.

@@maxjames00077 yeah in my model I have started to adjust fcf with SBC like you suggested

@@salihozt Got any stock recommendations that look cheap for the moment?

@@maxjames00077 not a recommendation but here are the ones that I believe that can deliver +%15 IRR over the next 10 years based on my DCF model adjusted with SBC reduction. AXP, BABA, CF, JD, CTRA , CVS , ATKR, DOW, IRWD, KFY ,LUV, NRG, OXY, SNBR, TOL, TROW, TX, THO, WBA, AMS: AD