>>if stock options get expensed, then we are in the 5th inning of the Nasdaq meltdown
If options were expenses, would Amazon be cash flow positive?
Found this at Marketwatch:
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Last week, the National Venture Capital Association, which represents 460 venture capital firms, issued a release in defense of their way of doing business.
Changing the handling of options would cause "irreparable" damage to an industry that's created millions of jobs and $1.3 trillion in annual sales in 2000, the association wrote. It would "render obsolete an incentive that has worked tremendously well," said the Chairman of NVCA, Thomas McConnell. McConnell is also a general partner at venture firm New Enterprise Associates.
Well, McConnell is partly right. Expensing options would definitely damage a company's profitability timeline and therefore potentially scare away investors. Expensing options, however, wouldn't render the incentive tool obsolete. Companies would still issue them. What's more, while there were jobs created due to the start-up phenomenon, there were also millions of jobs lost. The Bay Area registered 7 percent unemployment recently.
So, what's an investor to do? One answer is to keep tabs on just how much options will hurt the bottom line. One way to do so is to look at a company's 10K. In Yahoo's (YHOO: news, chart, profile) most recent audited filing, the company said it would have recorded a loss of $983 million in 2001 if it were to account for options. This compares to the recorded annual loss of $92.7 million. In 2000, Yahoo would have reported a loss of $1.2 billion vs. a gain.
According to Merrill Lynch's report, Cisco Systems, (CSCO: news, chart, profile)Agilent, Altera, Apple Computer, Brocade, Sanmina and TI were the companies that would have seen the greatest reduction in earnings.
Not only do earnings look artificially better, cash flow looks healthier as companies enjoy the tax benefit to their cash flows. In the Merrill report, nearly 30 percent of the net-operating cash flows in 2001 were derived from stock-option tax benefits. The companies that enjoyed the greatest percentage tax benefit were Amazon.com (AMZN: news, chart, profile), Altera, Lucent and Conexant |
