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Technology Stocks : Qualcomm Incorporated (QCOM) -- Ignore unavailable to you. Want to Upgrade?

To: Elroy who wrote (122024)	7/24/2002 9:16:37 AM
From: Wyätt Gwyön	Read Replies (4) \| Respond to of 152472

no, it is not double counting, because the expense of option grant is compensation the moment it is given, whereas dilution to EPS happens much further down the line (perhaps a decade later). if you followed that double-counting line of thought, you could have a co with fully diluted EPS of $1 a share in year 1. let's say in Q4 year 1 it earned 25 cents, and it granted options equal to 10% dilution. however, these options do not immediately dilute the EPS, even though they immediately compensate employees. this means that the EPS understates the true expenses for year 1 by 10%. the bubbleheads will argue that eventually the dilution will "catch up". but this is BS, because in year 5 (when the dilution catches up), the co will issue another 10% options grant, which it will again not expense and thus overstate earnings in year 5. so you really need to think about the immediacy of options as compensation. expensing captures this, whereas dilution down the road does not. as another example, let's say i have 100K and use that capital as margin to sell naked calls. i will immediately receive cash for the calls (just as a company immediately receives work for the calls it gives employees) (call that Process 1). only down the road will i know to what extent my 100K base capital will be "diluted" by call-holders exercising the calls i sold them (call that Process 2). so they are two separate processes.

To: Elroy who wrote (122024)	7/24/2002 10:52:09 AM
From: Stock Farmer	Read Replies (2) \| Respond to of 152472

Elroy, the problem with options doesn't show up in "fully diluted" EPS. Folks are deluding themselves by thinking so. How many people on this thread are investing 'cause of Q's earnings today? Rhetorical question. They are looking at earnings growth: take this year's results and extrapolate forward to next year and the year after and so forth. Gotta do the same with stock option dilution. Take this year's dilution from options, add next year's, and the year's after... and extrapolate forward too. 5% may not seem like much, 'till you take it out 20 years where it's 2.6x. That's the first point. The second point is that stock options granted this year don't even show up in diluted EPS figures. The company only publishes in-the-money vested options. Not unvested options. Or options underwater. Yes, but all those granted options are underwater. Should we ignore them? Let's say you plan on getting a nice 10% return for the next 10 years. Puts the price up to $77.80 by then and might drive a few of those "deeply underwater" options high and dry. Oh, not expecting a nice return? Then what makes the stock a "good investment"??? As to your specific concern: I have never understood the reason people want option grants to run through both the operating expense lines AND the diluted share count - it seems like double counting to me. Yes, it is double counting to some degree. Or counting the same thing different ways, if you like. What's wrong with that? For exactly the same reasons, we report on both market share figures and revenue (for example). And talk about subscriber growth. And patent portfolios and intangible assets and whether or not WiFi is complementary or competitive to CDMA... We count stuff in the company's favor ad nauseum. Counting a few of the costs a few different ways is hardly irrational. Besids, it's not like folks use Diluted EPS for very much at all, is it? Like when was the last time you even heard someone mention "diluted EPS", except as a reason not to expense stock options??? The idea here is to triangulate in on what it costs in dollar terms for the company to generate a dollar's profit, how many of those we can expect in the years to come, and the degree to which the mix is changing over time. John