This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Greenberg: Is the Market Mispricing (and Overvaluing) Yelp, Pandora, Twitter and More?

By: Herb Greenberg | 02/05/14 - 09:26 AM EST

Stocks in this article: AMZNYELPZPLNKDTWTR

SAN DIEGO (TheStreet) -- Say what you will about Amazon  (AMZN) the stock, but you can't take this away from the online retailer: At least it tells you, right up front -- in the third paragraph of its earnings releases -- what its true share count is.

From its most recent earnings report, Amazon says:

"Common shares outstanding plus shares underlying stock-based awards totaled 475 million on September 30, 2013, compared with 469 million one year ago."

The key phrase is "plus shares underlying stock-based awards." Spelling it out, like Amazon does, gives analysts and investors an easy way to calculate the company's true market value and (if the company is making money) fully diluted earnings (or loss) per share.

The difference between diluted and the "basic" share count, as it's called, is often not that great.

Until, that is, you start looking at some of the newer tech companies, like Yelp (YELP), Pandora (P), Twitter (TWTR), Zillow (Z) and LinkedIn (LNKD).

The difference is beyond startling, with some dilution well in the double-digits.

Consider, for example:

  • Yelp's stated number of shares is 65.5 million. Add in stock awards, and total shares are 76.6 million. The difference: 17%.
  • Zillow: 36.7 million shares; 5,600 stock awards; total, 45,800. Difference: 25%.
  • Pandora: 184.6 million shares; 34,176 stock awards; total, 218,843. Difference: 19%.
  • LinkedIn: 113,940 Class A Shares; 23,971 Class B shares, 5,967 stock awards; total, 137,911. Difference, 21%.
  • Twitter: Good luck trying to decipher the exact number from its IPO prospectus, but the difference between the headline share count and the real share count is around 25%.

Here's the rub: You wouldn't know it from the market valuations used by analysts from the big Wall Street firms, because they tend to just use the basic share count.

Why? My guess is, they use the same market-value numbers shown on Bloomberg, Factset or some other data service, which automatically mine them from the "basic" share-count line in SEC filings.

When companies are losing money, the basic and diluted share count is the same. As Yelp and other companies say in their SEC filings, as required by accounting rules, they intentionally exclude stock awards from earnings per share calculations, because "their effect would have been anti-dilutive for the periods presented."

In other words, it would make losses seem less than they really are.

Trouble is, that shouldn't matter to analysts when it comes to valuations and models. I would argue their models should be based on the full share count, even if they have to dig through SEC filings to find it.

Using anything less makes a mockery of their models. And in no small way, given the difference between the headline share count and the real share count. We're talking substantial dilution if these companies ever make money; in which case, earnings will be calculated off the real share count.

That's another way of saying: Current models on many of these companies, by many analysts, are steeped in the land of make believe.

Reality: If the analysts did their models the right way, using the real number of shares outstanding, whatever targets they have on the stock based on a multiple of revenues would be dramatically lower. Wouldn't want that in a market like this, with investment banking fees at stake, would we? (Oh, I forgot, that doesn't happen anymore.) All of this, of course, drives serious investors nuts, because they're looking at the total picture. As Brad Ginesin of Polar Capital says, "The playing field is not level." On one hand that gives the good analysts a leg up on one of the market's last great inefficiencies; on the other, like it or not, the Street tends to be pegged to the targets and estimates from analysts at the big firms. The solution? I propose the Amazon Rule. This would require all companies, at the top of their earnings releases, to state what their real share count is. This may not seem like a big deal now, but the numbers are the numbers. At some point the real numbers do matter.

-- Written by Herb Greenberg in San Diego





Herb Greenberg, editor of Herb Greenberg's Reality Check, is a contributor to CNBC. He does not own shares, short or trade shares in an individual corporate security. He can be reached at herbonthestreet@thestreet.com.

To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.

Markets

DOW 16,399.67 +19.26 0.12%
S&P 500 1,904.01 +17.25 0.91%
NASDAQ 4,316.0740 +57.6360 1.35%

Herb's Tweets

Brokerage Partners

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
Real Money Pro

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Trifecta Stocks

Trifecta Stocks analyzes over 4,000 equities weekly to find the elite 1% of stocks that pass rigorous quantitative, fundamental and technical tests.

Product Features:
  • Model portfolio
  • Trade alerts
  • Recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
Stocks Under $10

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Dividend Stock Advisor

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Breakout Stocks

Bryan Ashenberg, using sophisticated stock screening and fundamental research, identifies potentially explosive small and mid-cap stocks.

Product Features:
  • Model portfolio
  • Small-cap and mid-cap focus
  • Intraday trade alerts
  • Weekly roundups
Options Profits

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
Top Rated Stocks Top Rated Funds Top Rated ETFs