Amazon and Facebook Now Mind the GAAP

Earnings ▶ At a moment of strength, a switch to less favorable accounting ▶ “There’s no better time to change your behavior”

For more than a decade, many of the largest technology companies have danced around the cost of paying workers, releasing profit numbers that don’t account for the heaps of stock they dole out. Instead of conforming to the U.S. standards known as Generally Accepted Accounting Principles (GAAP), which include equity-based pay costs, roughly four in five of the 70 tech companies in the S&P 500 index use handpicked profit measures that make their earnings look better, according to data compiled by Bloomberg for their latest fiscal years. The NON-GAAP measures raised the businesses’ collective earnings 23 percent, to $239 billion.

In their latest quarterly earnings reports, Amazon.com and Facebook stopped eliding their stock-based compensation, joining exceptions such as Netflix and Intel. “We view it as a real expense,” Facebook Chief Financial Officer David Wehner said on his April 27 earnings call. Unlike in previous reports, the CFO focused on GAAP numbers and said he would do the same on future calls. A day later, Amazon reported stock-based pay for its different businesses for the first time.

During the first dot- com boom, fast- growing tech startups argued that the option grants they were handing employees were too difficult to reliably value for the purposes of quarterly reports. That’s still the default position in an era when most equity grants come in the form of restricted stock with a straightforward vesting schedule. The result: Some serious money is factored out of the bottom-line reporting. The average public U.S. company has a price- earnings ratio of 17—meaning its stock price is 17 times greater than its estimated 2016 earnings per share— or 18, when you count stock compensation, according to Sanford C. Bernstein. Facebook’s p- e’s are 35 and 50; Amazon’s are 63 and 122.

So why make the change now? “If you can act from a position of strength, which Amazon and Facebook clearly are, there’s no better time to change your behavior,” says Denny Fish, a portfolio manager at investment firm Janus Capital Group. Facebook just reported one of its best quarters, and Amazon nearly doubled analysts’ already bullish profit estimates. “They look more responsible, and it makes them accountable for how they issue stock for compensation,” says Fish.

While investors rarely punish the industry for its creative accounting, Facebook’s and Amazon’s shifts also follow mounting criticism about overuse of NON-GAAP numbers. In

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