After the initial head fake sell off following Q4 results, Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) appears poised for the rally to $1,000. A reporting change announced with the Q4 results appeared to have spooked the market.
The stock quickly sold off following solid numbers and trading relatively cheap. Though Alphabet has rallied back to all-time highs suggesting investors have officially spoken on the issue of GAAP versus non-GAAP numbers for good reason.
On the Q4 earnings call, CFO Ruth Porat made the following disclosure that surely surprised the market:
My suggestion is that the $40 dip in the stock was over some initial panic that Alphabet was no longer going to retain value if the EPS dips. After all, the stock-based compensation is a large amount of the quarterly EPS totals.
For Q4, Alphabet had $1.8 billion in SBC charges, up from $1.4 billion last year. For all of 2016, the SBC charges were an incredible $6.7 billion. Remember though that the share count grew by 3.2 million shares over last Q4 and accounts for the SBC within the EPS calculation.
Source: Alphabet Q416 earnings release
After a week or so, the market shook off this irrational sell off. In reality, the value of the stock is not altered at all whether Alphabet changes the reporting. The key cash flows won't change and including the SBC charges in the diluted EPS number is duplicative.
The real impact to the company is higher share counts. The accounting rationale for the charge is to derive the effectiveness of management and to factor in the cost of the issuance of shares for compensation.
The number though is included in the EPS that includes the share count. Investors looking at cash flows won't include the SBC charge any way and this explains the stock rebounded to close at an all-time high over $872.
GAAP Vs. Non-GAAP
Regardless of what the company does with reporting, investors can value the stock either way. The interesting part is how the stock is reported by different financial sites that report the EPS numbers.
Yahoo Finance is clearly shifting towards using the GAAP numbers. The 2017 EPS estimates have dipped over the last 60 days to only $33.41 from $41.11.
Source: Yahoo Finance
Conversely, YCharts is still using the non-GAAP numbers for EPS estimates. The charts show a 2017 EPS estimate of $41.63 and $48.66 for 2018.
Using the traditional non-GAAP numbers, Alphabet is only trading at a forward P/E multiple of 17.9. To reach the magical $1,000 mark, the stock would only trade at a P/E multiple of 20.6.
The key investor takeaway is that Alphabet appears ready to break out towards $1,000. The stock could face a jolt when reporting Q1 results towards the end of April that doesn't include non-GAAP EPS numbers excluding SBC.
Either way, investors would be wise to ignore the noise surrounding the official reporting of these numbers and load up on any irrational dips.
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