Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Technology Stocks : Dell Technologies Inc. -- Ignore unavailable to you. Want to Upgrade?

To: Richard Forsythe who wrote (138131)	7/30/1999 2:01:00 PM
From: Chuzzlewit	Read Replies (2) \| Respond to of 176388

Richard, as you pointed out, See's accounts for the candy consumed by employees as a cost -- it is part of their COS. The situation is entirely different for Dell. The cost to Dell is the value of the option -- not the differential between exercise price and market price. And that cost is not recorded on the income statement. Suppose that we are dealing with a capacity constrained industry that gives away its good to employees. From an economic perspective the business is paying for wages in kind. That is, they pay less than market wages and supplement with freebies. There is an economic cost that the business implicitly recognizes on the income statement -- decreased sales and the cost of producing those freebies. That is what Dell does with options, but unlike the the business that implicitly recognizes the costs Dell, along with most tech companies, buries the costs in the arcana of footnotes. I alluded earlier to a conversation I had with the VP of HR at one of the internuts who readily admitted that the driving factor behind employment at his company was stock options. If the company had to pay market wages for employees it would not last very long owing to negative cash flows. The conversion of options plus selling new shares provides the cash flow the company needs -- not operations. So you see, the existence of these companies depends on high stock prices, and the investors are gulled by the fact that true costs are not recognized. And that leads to inflated earnings. TTFN, CTC