The exclusion of stock based compensation in Twitter Inc’s earnings metrics by Wall Street was brought under the magnifying glass by Sanford C. Bernstein
Twitter Inc (NYSE:TWTR) was the subject of a report by Sanford C. Bernstein dealing with the critique of Wall Street’s practice of using earning metrics without taking stock based compensation into account, a practice that is especially popular for the valuation of Internet stocks. Bernstein finds nothing wrong with the practice but says that stock based compensation can be quite a significant operating expense.
Bernstein noted that the method of evaluation was particularly troublesome for companies like Twitter whose stock compensation expenses were greater than its earnings even before interest, taxes, depreciation and amortization. Commenting on the company’s IPO they said that its heady valuation caused investors to pay more than the stock was worth for the stock.
The pro forma method is a rather bad fit for Twitter. According to Bernstein’s calculations in which they made some generous assumptions considering the state of Twitter’s current user growth problems and average revenue per user as well as the company’s margins arriving at a valuation of $15-20. However taking stock based compensation into account its price target was revised to merely $12-14. However Bernstein argues that since the proforma method is a standard on the street their price target of $17 reflects that as well as the afore mentioned $15-20 range of possibilities for the stock.