How Bad Is Stock Based Compensation For Investors?

Understanding the true cost of stock based compensation to shareholders.

I’ve written numerous articles about stock-based compensation in the past for a few reasons.

For one, it’s super common. Almost every major tech company in the world pays some form of stock-based compensation to employees. Two, stock-based compensation is the silent killer that destroys shareholder value beneath the surface.

Yet despite these two facts, shareholders still do not seem to fully understand stock-based compensation and the massive impact it has on shareholders.

In this article, I want to show you just how bad stock-based compensation can be for shareholders and why it deserves more attention from investors.

Covid darling

Let’s use the one-time Covid darling, Zoom Communication Inc, as an example. As you probably know, Zoom is a video conferencing software company whose business simply exploded during the COVID lockdowns. Revenue soared and its share price rocketed.

But as the world reopened, Zoom’s growth also stalled and its share price has since come back down to pre-COVID levels.

Today, Zoom is guiding to generate free cash flow of US$1.7 billion for FY2027 (fiscal year ending January 2027). That’s still a decent number, which shows that Zoom continues to be a strong business in the aftermath of COVID.

Investors love using free cash flow to measure a company’s profitability as free cash flow is the cash generated from operations minus cash spent on capital expenses.

In theory, this is cash that can be returned to shareholders via dividends. However, free cash flow does not take into account stock-based compensation.

The hidden cost

Stock-based compensation is the hidden cost that eats into shareholder returns.

In FY2026, Zoom granted 10 million shares to its employees. These are shares that will vest over the next 3-4 years. We can assume that based on Zoom’s grant history, around 10-11 million shares will vest each year. In FY2026, for example, 11 million shares vested.

Zoom has an active share buyback plan. In aggregate, it is buying back more shares than is vesting. But that also means Zoom is actively using its free cash flow to offset the shares that vest – the cost to shareholders is immense!

To buy back the 11 million shares that vested in FY2026, Zoom has to pay around US$1.14 billion (based on its current share price of US$104).

Earlier, I mentioned that Zoom is expecting to generate US$1.7 billion in free cash flow in FY2027. If management decides to offset the stock-based compensation by conducting buybacks, the remaining cash left over for shareholders is less than US$600 million.

Valuations change

Stock-based compensation can, hence, make a huge difference to how we value a company.

In Zoom’s case, the company’s free cash flow of US$1.7 billion looks healthy on the surface and its current market cap of US$31 billion represents a somewhat decent valuation of 18 times free cash flow.

But if you account for the cash that will simply vanish from shareholders’ hands just to offset dilution, the company now only has around US$600m to return to shareholders.

This changes the picture completely. After making this adjustment, at a US$31 billion market cap, Zoom trades at much less palatable 51 times adjusted free cash flow.

The Good Investors Take

Stock based compensation is often the silent killer that destroys shareholder value – more so for companies that rely heavily only on stock-based compensation. As such, the headline free cash flow figure may not present the full picture of how profitable a business is.

Zoom is already a slow growing, mature company. Yet it is still off-setting stock-based compensation with a large part of its free cash flow.

The key thing for investors to note is how much cash can a company actually return to shareholders, once all employees’ stock-based compensation is offset. Only then, can investors truly gauge how much cash is left over for investors.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I don’t have a vested interest in any company mentioned. Holdings are subject to change at any time.

Divergence of Returns In The Index

Some companies have fallen hard.

The S&P 500 index is up about 8% in US dollar terms so far in 2026. That’s a decent return for less than half a year. The index is also on track to surpass its historical 10% annual return for the year.

Similarly, the tech-heavy NASDAQ index is up 13% year-to-date.

Both indexes are also sitting near an all-time high.

Despite this, there is an interesting phenomenon happening.

Usually when the indexes are at an all-time high, you’d expect to see most companies to be up year-to-date. But that’s not the case this year

Although the indexes have performed well, nearly half of the indexes’ components are currently underwater for the year.

Of the 503 stocks in the S&P 500 index, 218 are negative for the year, while 45 of the NASDAQ’s 101 component stocks are down. The depth of some of the drawdowns are also quite steep.

Of the 218 stocks that are down in the S&P 500, 122 are currently more than 10% below where they started the year. And 56 are 20% or more underwater for the year. Meanwhile, more than 20% of the NASDAQ components are down more than 20% in 2026 thus far.

This has created a really interesting scenario where despite the indexes being near all-time highs, there are pockets of the stock market, even in the large cap arena, that are spotting materially cheaper valuations than they did just five months ago.

Hunting for value

Lower share prices naturally mean lower valuations and could be a good hunting ground for value investors.

With the index at all time highs, searching amidst beaten-down individual names could be a great way to gain exposure to the market.

The list of stocks that are down year-to-date include some well known companies such as FICO, Lululemon, Tractor Supply, and Accenture to name a few. The four listed companies are down 35%, 43%, 39% and 37% respectively this year.

This being said, just because a company is trading at a lower stock price does not automatically make it good value. Even seemingly stable companies can run ahead of fundamentals and corrections may just be stock prices coming down to more sane valuations.

Previously “deep-moat” companies can also run into trouble or face disruption, as is the fear surrounding software-as-a-service companies as they are potentially facing disruption from artificial intelligence.

Nevertheless, as an investor, seeing that there is a substantial list of big cap stocks that are trading down for the year does excite me.

Why is the stock down?

When hunting for value, it is important to understand why the stock is down. There could be a legitimate reason for a stock to fall.

For instance, FICO, the company behind the FICO credit score that banks in the US use to assess whether to provide loans to someone, is facing a potential new competitor in the form of Vantage Score which could lead to market share losses in the future. (Vantage Score has existed for many years, but there are recent regulatory changes that have eaten away at FICO’s previous monopolistic status.)

A stock could also be down simply because its price had run ahead of its fundamentals.

Take Palantir for instance. The company just reported stellar revenue growth of 85% in the first quarter of 2026 and is guiding for revenue growth of more than 100% for 2026.

Yet the stock price is down 25% year-to-date. This could simply be because Palantir was trading at an overly expensive valuation of 100 times its 2026 free cash flow guidance. With the aforementioned year-to-date decline, Palantir now trades at a more reasonable but still expensive 74 times its 2026 free cash flow guidance.

Happy hunting

Although there are companies that are facing challenges and so have stock prices that are down for a reason, there are potentially also companies that may be mispriced after a steep drawdown.

This could provide a nice entry point for patient investors who are willing to ride out the negative sentiment and potential downward momentum.

It is also a great way to enter the market if you are not keen to buy directly into the index which is trading at an all-time high price.

How Brilliant Managers Still Make Shareholders Poorer

There are capital allocation mistakes that even the smartest management teams commit.

The primary role of management in a company is simple: Provide shareholders with the best rate of return.

This requires operational excellence, profitability, and most importantly, the prudent allocation of capital.

Reaching the helm of a listed company is the pinnacle of professional ambition for many people, and therefore only the very smartest people in the world are selected to be leaders of listed companies.

Yet despite the undeniable talent that leaders must exhibit to get into the role, some leaders still tend to do things that are not optimal for shareholders.

In my years of investing, I’ve identified two areas where even the “smartest” consistently fail shareholders.

Buybacks

One of the most common value-destroying “habits” of management is to buy back shares at bad prices.

Although buybacks are not inherently bad for shareholders, it is extremely price-sensitive.

When a company buys back shares, it reduces the share count, increasing the ownership of remaining shareholders.

The goal of buybacks is to be able to provide remaining shareholders with higher future dividends per share, eventually. Sounds great, but there’s a catch.

If buybacks are done at a very high valuation, the number of shares that the company can retire from buybacks drop. This reduces its impact.

And buybacks have a cost- it is paid for by the company’s cash coffers. That war chest can be used for many things such as acquiring another business, paying a dividend or simply being stored on the balance sheet to be used during opportune times. All of these could be better uses of cash than buying back shares at high prices.

Too often I notice companies guide toward a certain amount of buybacks for the year. This means that the company plans to use its cash to buy back shares during the year no matter the price of the shares at that time. This is lazy and can be detrimental to shareholders if share prices rise to an unsustainably high price.

A better way to do it would be to only buy back shares when shares are cheap or trading close to “intrinsic value”.

A rare example of a leader that bucks this trend is August Troendle of Medpace (NASDAQ: MEDP). Under his guidance, Medpace has only repurchased shares at prices that August deems cheap. He has even directed Medpace to take on debt to buy back shares when prices are cheap. He has let cash pile up on the balance sheet when share prices rose too high.

Stock-based compensation

Stock-based compensation is the practice of paying employees in stock.

I’ve written in depth about some of the drawbacks of stock-based compensation here. While often marketed as aligning incentives, stock-based compensation can be very dilutive.

This is especially true when stock prices are depressed.

When stock prices are low, the number of shares that a company needs to grant is higher in order to satisfy an employee’s wage demands.

Yet, management teams seem indifferent to this, actively using stock-based compensation despite these nuances.

I believe stock-based compensation has a role, especially as a way to incentivise top leaders of a company.

But using stock-based compensation across the entire company and through different cycles of the company is lazy management.

Leaders need to rethink their total rewards framework. If they must give employees stock-based compensation even when shares are cheap, it is important that leaders find a way to manage dilution, perhaps through opportunistic buybacks.

Constellation Software (TSE: CSU) has a great compensation structure for executives that avoids this conflict. It does not provide traditional stock-based compensation. But to align leaders with shareholders, executives need to invest 75% of their bonus into Constellation Software’s common shares. These shares are held in escrow for four years so that executives’ wealth is also inextricably tied to shareholders.

Bottom line

Top executives are paid top dollar to run a company to maximise shareholder value. Yet elite leaders continue to do things that erode investor wealth. As shareholders, we can’t control what managers do but we can choose where we deploy our capital.

When we see a management team unwittingly destroying shareholder value, either through “lazy” buybacks or broad-based stock-based compensation, take it for what it is – a massive red flag.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I currently have a vested interest in Medpace. Holdings are subject to change at any time.

3 Things That May Drag a REIT’s Distribution Per Unit Lower

Look under the hood at a REIT’s financials to understand if its future distributions are at risk of a decline.

Singapore-listed REITs, or real estate investment trusts, are a favourite investment vehicle for many Singaporean investors.

REITs provide investors with the opportunity to invest in property and also provide much more liquidity than investing directly in real estate. In addition, many REITs in Singapore have juicy trailing distribution yields that can be as high as 9%. And with interest rates likely on the decline, REITs can also benefit from lower interest expenses and so can have higher distributions to unit holders.

Given the above, I did some research on REITs recently to see if there were any that might be attractive opportunities. But as I conducted my study, I noticed some common issues about REITs that may end up being a drag on their future distributions per unit.

Here’s what I found.

Management fees that are paid in units

A common theme I noticed about REITs in Singapore is that most of them pay the bulk of the REIT manager’s fees with units in the REIT.

Take a look below at Keppel DC REIT’s (SGX: AJBU) financial statement for the first half of 2025. They show the adjustments made to Keppel DC REIT’s net profit to determine the income available for distribution. One of the adjustments made is the management fees paid in units.

*Source: Keppel DC REIT 2025 first-half financial statement*

To prop up a REIT’s distribution per unit (DPU), a REIT’s manager can choose to receive its fees in units of the REIT instead of cash, since doing so means cash can be returned to shareholders. But this will be a drag to a REIT’s DPU over the longer term for two reasons.

First, once the REIT’s manager opts to receive all or a bigger portion of its fees in cash, the amount available for distribution to unitholders will decline (all other things remaining constant). Second, because the REIT manager opted to receive its fees in units in the past, the REIT had to issue new units, which resulted in a higher unit count; future distributions are thus divided across a larger unit base.

Keppel DC REIT is not the only REIT that does this. In fact, it is common practice across REITs in Singapore.

Sasseur REIT (SGX: CRPU) is another example. Take a look at the REIT’s condensed income statement for the first half of 2025:

*Source: Sasseur REIT 2025 first-half earnings presentation slide*

The base fee of Sasseur REIT’s manager that is paid in cash increased by S$0.4 million from the first half of 2024 to the first half of 2025. This is because the REIT manager opted to receive 30% of its base fee in cash in the first half of 2025, rather than the 20% it chose for the first half of 2024. This is a real case of how the DPU of a REIT can decline simply because a REIT’s manager chooses to receive less of its fees in cash.

The way I see it, the DPU of Sasseur REIT is being propped up by the REIT manager’s decision to receive some or all of its fees in units rather than cash. Once this goes away, DPU will be pressured.

Another example is Frasers Logistics & Commercial Trust (SGX: BUOU). These are the adjustments the REIT made to obtain its distributable income:

*Source: Frasers Logistics & Commercial Trust’s FY2025 first-half financial statement*

For Frasers Logistics & Commercial Trust, the column on the right of the table refers to the first half of FY2024 and the column on the left refers to first half of FY2025. In both periods, the REIT added a significant amount of “management fees paid in units” to net income, which puffed up distributable income. But in the first half of 2024, 100% of the REIT’s management fees were paid in units while in the first half off 2025, only 43% was so. Because of this change, Frasers Logistics & Commercial Trust had a lower upward adjustment to distributable income in the first half FY2025, which was one of the reasons its DPU to shrank year-on-year.

Watch for capital distribution

Another thing to look out is whether the DPU is being bumped up by one-off or short-term capital distributions. We can return to Frasers Logistics & Commercial Trust as an example.

*Source: Frasers Logistics & Commercial Trust’s FY2025 first-half earnings presentation*

The image above shows that Frasers Logistics & Commercial Trust’s total distributable income were bumped up by capital distributions in both the first half of FY2025 and the first half of FY2024.

The problem is capital distributions are one-off, or short-term distributions, and are dependent on gain on divestments. A REIT’s manager may decide to retain or distribute capital gains depending on the REIT’s performance for the year in order to “smoothen” out distributions. But as investors, we should note that these are not long-term solutions and eventually this capital distribution buffer may run out.

We can look at Far East Hospitality Trust* (SGX: Q5T) as an example:

*Source: Far East Hospitality Trust’s 2025 first-half earnings presentation*

Far East Hospitality Trust’s distribution to stapled security holders include distributions from other gains. The stapled trust divested one of its properties in 2022 and has since been distributing the divestment gains to unitholders at around S$8 million annually; the manager of the trust had decided to distribute the divestment gains over a few years to smoothen the trust’s distribution per stapled security (DPS). But as with all capital distributions, the well will eventually run dry, and absent the capital distribution, the DPS will likely drop.

*Far East Hospitality Trust is technically not a real estate investment trust. Instead, it is a stapled trust consisting of Far East Hospitality Real Estate Investment Trust and Far East Hospitality Business Trust. But for the purposes of this article, there’s no need to split hairs.

Interest rate sensitivity

When looking at how sustainable a REIT’s DPU is, we also need to look at its interest rate sensitivity. REITs have been reporting rising finance costs in the last few of years as their debt gets refinanced at higher rates or as their floating rate debt gets repriced. The rising finance costs have been a drag to their DPU.

This why I prefer a REIT with a high interest coverage ratio. A higher interest coverage ratio means that a change in interest rates would have a smaller impact on distributable income.

Imagine a REIT with an interest coverage ratio of 5. All else equal, a 20% increase in finance costs will only lead to a 5% decline in DPU. Comparatively, a REIT with an interest coverage ratio of 3 will suffer a 7% decline in DPU.

CapitaLand Integrated Commercial Trust (SGX: C38U) has an interest coverage ratio of 3.3, shown in the table below, which looks fairly low to me and suggests that the REIT’s DPU is sensitive to interest rate hikes. But we are in a fairly high interest rate environment at the moment, so it is perhaps more common for interest coverage ratios to be on the lower end of the spectrum during this time.

*Source: CapitaLand Integrated Commercial Trust 2025 first-half earnings presentation*

Final Takeaways

Singaporean investors invest in REITs for steady income.

Although Singapore-listed REITs have historically performed decently, investors still need to assess if a REIT’s DPU can be sustained in the long-term. To do so, they can peer under the hood and determine if the REIT’s DPU could be pressured by (1) a higher unit base, (2) the end of capital distributions, and (3) the end of fees being paid in units.

It is also important to assess how sensitive a REIT’s DPU is to interest rate spikes. Rates may be likely to be on a downtrend in the near future, but there may be times ahead when interest rates spike again.

Does Grab Holdings’ Recent Convertible Note Offering Make Sense?

Management teams that can make use of opportune pricing of stocks and debt can greatly increase the returns of shareholders.

Grab Holdings (NASDAQ: GRAB) recently announced that it would be raising cash through a convertible note offering. This came as a surprise to investors as Grab still has lots of cash on its balance sheet.

But if you look at recent history, it is not uncommon to see companies raise cash when the cost of capital is relatively low, even when they have sufficient cash on their balance sheets.

Companies such as Zoom Communications (NASDAQ: ZM) and Tesla (NASDAQ: TSL) raised cash through a secondary offering in 2021 when their stock prices went hyperbolic.

With stock prices rising to new all-time highs again, we could potentially see more companies taking advantage of favourable market conditions to raise cheap capital. With that in mind, I thought it would be a good time to share some quick thoughts on such capital raises.

Understanding cost of capital

The question of whether a company should raise capital boils down to whether the returns earned on the capital exceed the cost of capital.

But there is a lot of confusion over what the cost of capital is. For debt issuance, the cost of capital is simply the interest that is paid on the debt. For equity issuance, the cost of capital is a lot more complicated.

There are a few schools of thought when it comes to calculating an equity’s cost of capital. I like to keep things simple – and the simplest way to think about it is by assessing the impact on future returns to shareholders on a per share basis. For instance, if a company needs to issue 300 shares and has 1,000 shares outstanding, the cost of capital is 30% of the company. To make the share issuance worthwhile, the company needs to ensure that the money raised will be able to increase the future stream of cash returned to shareholders by at least 30%.

So a company that is projected to return $1 per share to shareholders for eternity will require the cash that is raised to increase that return-figure to at least $1.30 to justify a share issuance that dilutes shareholders by 30%.

Does Grab’s issuance make sense?

With this in mind, let’s take a look at Grab’s recent note offering. Last month, Grab announced that it would be raising US$1.5 billion through a zero coupon convertible note offering.

Convertible note offerings are debt offerings in the sense that the money needs to be paid back. But because it is convertible, these notes can potentially be turned into equity. In Grab’s convertible note offering, the debt can be turned into equity if its stock price trades above the conversion price of US$6.55. If the conversion happens, Grab does not need to pay back cash to the note holders but the new shares will become dilutive to existing shareholders.

Let’s assume that all these notes will be turned into equity. As of end-2024, Grab had a fully diluted share count of 4.3 billion shares (including warrants, unvested restricted stock units, and options). The note offering, if converted to shares, will result in 229 million new shares being created, which means 5.3% dilution. In other words, for the convertible note offering to make sense for Grab, it needs to use the proceeds to increase its future cash returned to shareholders by at least 5.3% per share.

This can be done in two ways: (1) Grow the cash generated by the company by more than 5.3% or (2) decrease the share count by more than 5.03% (a 5.03% reduction in share count will lead to 5.3% per share growth – you can do the math)

Grab mentioned that it could potentially use the cash to buyback shares. If they manage to do it at the current share price of around US$4.70, the company will be able to buy back 330 million shares or around 7.3% of its fully diluted share count (this includes the 5.3% dilution from the conversion of the convertible notes). This would be a massive win for the company. In essence, Grab would be able to reduce its share count even after the conversion of the convertible notes to shares, simply by using the cash raised and buying back its shares at current prices.

Grab doing a massive buyback may not be far fetched, as the company also simultaneously announced along with its note offering that it is buying back around US$273.5 million of its shares at US$4.68 each from buyers of the notes.

Bottom line

As investors, it is challenging to assess whether equity raises make sense or not. The theory mentioned above may be simple but in most cases, there are many moving parts.

Cash is also fungible, and we usually do not know where the capital went. If the company had not raised cash, which aspect of its expenses or investments would it have cut?

As an investor, instead of trying to assess where the money went, one thing that we can do is to dissect whether management teams are raising capital at opportune times; opportune times are when stock prices are high or when interest rates are low. This is when the cost of capital is the cheapest. Likewise, companies should be buying back stock when stock prices are low and holding back on debt issues when interest rates are high.

As investors, owning a strong business is one thing, but we also need management teams that are savvy with capital allocation and capital raising. Management teams that can make use of opportune pricing of stocks and debt can greatly increase the returns of shareholders.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I currently have a vested interest in Tesla Inc. Holdings are subject to change at any time.

Can The (Micro)Strategy Bitcoin Playbook Last Forever?

Strategy’s amazing financial engineering.

Strategy (recently renamed from Microstrategy) is one of the top performing companies in the US stock market in recent years. The stock price of the highly controversial “Bitcoin holding company” is up 210% in the last year alone and up a staggering 3,300% in the last five years.

One reason why Strategy has done so well is because it is one of the best at raising cheap capital. How does this work?

Self-fulfilling cycle

Strategy’s Bitcoin playbook is pretty simple and yet quite ingenious. The “Bitcoin holding company” basically takes advantage of its stock price trading at a premium to book value by selling new shares for cash.

Imagine a company that has a book value of $1 million and has 1 million shares. Each share, hence, has a book value of $1. But let’s say that for some reason, someone is willing to buy the shares at $2 each. The company can take advantage of this and sell new shares to this buyer. Let’s say the company sells 1 million new shares for $2 million. After the share issuance, the company now has 2 million shares outstanding and $3 million in book value. The book value per share is also now magically $1.50. The process can become a self-fulfilling cycle where the company raising shares above book value actually leads to the book value per share increasing.

This is exactly what Strategy has done. Its book value per share has risen by using this simple financial engineering trick. But Strategy then also uses proceeds from its share issuance to buy Bitcoin. If Bitcoin’s price rises, Strategy’s book value per share will increase yet again.

In 2023, Strategy raised US$2.0 billion from issuing shares. In 2024, the company raised an even larger sum of US$16.3 billion from ordinary share sales. As of its last quarterly earnings update for the first quarter of 2025, it has raised another US$5.7 billion through sales of common shares and preferred shares.

But Strategy has gone yet one step further. The company has also raised capital through debt markets to buy more Bitcoin, in effect leveraging up its balance sheet and increasing its exposure to Bitcoin. Strategy’s total debt has increased from US$2.2 billion in 2023 to US$7.2 billion in 2024, and US$8.1 billion in the first quarter of 2025.

What the bulls believe

Investors who are bullish on Strategy believe that this virtuous cycle can continue forever. They believe that Strategy’s premium to book value will exist for many years as there are sufficient buyers of the stock who believe in this self-fulfilling cycle.

If true, Strategy will become a compounding machine simply by issuing new shares at a premium and juicing its book value per share. There’s also the Bitcoin purchases, which adds another growth-factor for Strategy’s book value per share.

But as I mentioned earlier, there’s also leverage at play with Microstrategy because the company has used debt to buy more Bitcoin that it can actually afford. Microstratregy’s book value will therefore swing more than Bitcoin’s price. If Bitcoin’s price rises, Microstrategy’s book value will go up faster.

When will the party end?

“I applaud Strategy’s playbook. But there are some risks that shareholders need to be wary of. The obvious one is if Bitcoin’s price falls. When this happens, Strategy’s book value per share will fall faster because of the leveraged nature of the company’s balance sheet. As of 31 March 2025, Strategy had US$43.5 billion worth of Bitcoin but only US$32.2 billion in equity. If Bitcoin’s price falls by 50%, Strategy’s book value would drop to US$10.5 billion, or roughly a 66% fall. For Strategy to enter negative book value territory, Bitcoin will need to fall by around 74% from the 31 March Bitcoin price.

The other major risk is if stock market participants decide that Strategy’s stock price simply does not deserve to trade at a premium to book value. In other words, buyers of the stock only want to pay book value to buy shares. This throws Strategy’s ability to raise capital cheaply out the window. But it also means that Strategy’ shareholders who first invested at a premium to book value could face a potential heavy loss.

As of Bitcoin’s price at the time of writing, Strategy’s book value is worth around US$38 billion. But based on the company’s current stock price, its market capitalisation is around US$108 billion, or a 180% premium to its book value. Even if Bitcoin’s price remains stable, but Strategy’s stock price reverts to no premium on book value, this could still lead to a painful 64% reduction in the stock price price.

For now, momentum and the current environment suggests that market participants are unlikely to bid down Strategy’s stock price so drastically so soon. But things can change during “risk-off” environments and when market participants become more cautious.

A double whammy for Strategy shareholders can happen if both Bitcoin’s price falls and Strategy’s premium to book value narrows.

The bottom line

Whatever you think about Michael Saylor and his Bitcoin views, he certainly has mastered the dark arts of financial manoeuvring. In most assets, fundamentals drive price. Saylor has managed to turn the script around, making price drive fundamentals.

But this comes with risks. If Strategy’s stock price collapses, the virtuous engine stops running. Saylor seems to be wary of these risks. While Strategy continues to issue shares to buy Bitcoin, Saylor is constantly selling his Strategy shares.

Despite the risks, market participants seem hungry for more of such companies. Besides Strategy, there are now a number of copy cats around the world, such as Metaplanet in Japan which has seen a meteoric rise in its share price this year. Its stock price is at an eye-popping 7 times book value.

For such companies, the party will end when there are no more greater fools to sell to (both for Bitcoin and for new shares of the company). Whether – or more likely, when – that happens is anybody’s guess. Just be careful not to be the last one holding the bag.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I do not have a vested interest in any companies mentioned. Holdings are subject to change at any time.

Passive Income

Knowing what you want to achieve, and what passive income is, is important

Passive income is not just income earned outside of your job. The real meaning of passive income is money that you earn with little to no effort.

Some may think that money earned in the stock market or from properties is passive income. Yet, this may not be the case. Stock market investors can sometimes be so caught up in trading and looking at stock prices that investing becomes a huge part of their lives and can even be considered another job. Property investing can also turn out to be tedious if you manage your properties yourself.

I know of friends who want to earn passive income but instead end up spending so much time on their investments. Don’t get me wrong. I love spending time learning and investing but this isn’t really “passive”.

Here’s how you can earn real passive income.

Stop trading the stock market

First, stop short-term trading. My definition of trading is buying stocks in the very short-term based on price action and charts. This is not investing and can become a part-time or full-time job as it requires a lot of time and effort. The more trades you need to make, the more effort is required.

We should aim to invest in a way that reduces the number of trades and amount of work that we need to do.

One way to do this is by investing long-term in set-and-forget investments. Investing in stocks that have the potential to grow earnings (and thus the share price) reliably over the long-term is one good strategy that lowers the time spent on investing.

You can also invest in passive index ETFs that track the performance of broad market indexes. Stock indexes have historically increased in value over a sufficiently long period of time and provide a good way to gain exposure to some of the biggest and most profitable companies.

You can also invest in dividend stocks that reliably pay a dividend. Investors from Singapore enjoy tax-free dividends when they invest in Singapore-listed dividend-paying stocks.

Outsource your investing

Another way to reduce time and effort spent on investing is to outsource your investing to an expert.

One way to do this is by employing financial experts who can advise you on stocks to buy or funds to purchase. You can also use robo advisors which can help you allocate your portfolio into a variety of investments.

While you will need to pay a fee for these services, having someone to invest on your behalf or advise you frees you from the hassle of doing everything yourself and saves you a ton of time.

Invest in other passive assets

You can also invest in other assets beside the stock market.

Assets such as long-term fixed deposits, government bonds, or even professionally-managed real estate may be a good way to grow your wealth without doing much work.

If you can find long-term investments that require little effort on your part but can provide a stable passive return, this is a potentially good asset to invest in and reduce your investment effort.

Know your goals

What do you really want to achieve? Do you want to grow your wealth as quickly as possible?

Then by all means go ahead and dig through annual reports, scour the market for undervalued stocks, sell weekly put options, or even manage your own AirBnB property for higher rental yields. There is nothing wrong with this and is my preferred style of investing.

But this is not passive income.

If you really want passive income, invest in long-term assets, find a professional or robo advisor to manage your wealth or build passive income by dollar cost averaging into funds or long-term assets.

While this may not always give you the best fee-adjusted returns, this is a true passive income strategy and frees up your time for other things in life.

Ultimately, when it comes to investing there is no one-size-fit-all strategy and knowing what you want to achieve can help determine how you should approach investing your spare capital (and time).

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I do not have a vested interest in any companies mentioned. Holdings are subject to change at any time.

Why Do Employees Love Stock-Based Compensation?

Stock-based compensation has its risks, but it can still be an attractive proposition for an employee

In the past, stock-based compensation was more common with fledging startups that had to find ways to preserve the little cash they had.

But today, stock-based compensation is used by almost every major company in the world. Even big firms with lots of cash continue to use stock-based compensation. One reason is because employees want to get paid in stock.

How it works

To understand why this is, we need to look at the mechanics of how stock-based compensation works.

In a typical compensation package, an employee may be offered an annual contract with, say, 33% of the compensation coming in the form of restricted stock units and the rest in cash. This means that an employee who is on a $100,000 annual package will get $33,000 worth of shares per year.

But here’s the catch. This $33,000 worth of shares is based on the share price at the time of signing the employment contract. If the share price rises, the amount that the employee receives each year will be more than $33,000.

For instance, many Nvidia employees who were hired before the massive run up in its stock price the last few years are now receiving shares every quarter that are worth so much than when they joined the company.

Here’s how the math works. Let’s say you were hired by Nvidia five years ago. Back then, its shares were trading at a split-adjusted price of US$6.10 each. You were given a US$200,000 annual package for five years that consists of US$134,000 in cash and US$66,000 in stock . Using the stock price of US$6.10, the US$66,000 in stock-based compensation means you will receive 10,819 shares each year. The number of shares that you receive each year is fixed, even if the stock price goes up or down. Fast forward to today, and that 10,819 shares that you receive each year is now worth US$1.1 million.

Typically, stock grants only last for a few years before they expire and new grants will be made at the current stock price. This is why some employees may want to leave the company after the stock price has run up a lot and they have collected all their shares from the initial grant.

Stock-based compensation lets an employee enjoy the potential upside from a company’s stock without having to put down their own capital to buy shares. For instance, you, the Nvidia employee who was hired five years ago, essentially “bought” US$330,000 (US$66,000 multiplied by 5) worth of Nvidia shares five years ago. That’s a huge bet for most people, but stock-based compensation allows an employee to enjoy the returns of this bet without actually having to buy shares.

Potential downsides

However, there are potential downsides for an employee who takes a pay package that has a significant component in stock-based compensation.

For public-listed companies, employees can sell the shares when they vest. But for private companies, the shares are illiquid and employees may not have an easy way to convert the shares to cash. In addition, employees who work for a small startup and get shares in the startup have a high risk that the startup fails and the company’s shares ends up worthless.

I know of friends who are stuck with shares in companies they previously worked for. These companies may be struggling or have no clear path to an IPO or to be acquired, leading my friends to be stuck with shares of the companies without any real means to cash out.

The risk for employees of public-listed companies who receive stock-based compensation is that the share price falls. This is the case for many US-listed technology companies after 2021, with many of their stock prices still down by 50% or more from their 2021 peak.

Imagine if you joined Okta in April 2021 and received a 4-year pay package of US$200,000 consisting of US$134,000 in cash and US$66,000 in shares. Back then the shares were trading at around US$244 each, so you would receive 270 shares per year. Today, 270 Okta shares are worth US$27,049 – a materially smaller sum compared to the grant value of US$66,000. You would have been better off taking US$200,000 in all-cash compensation.

Bottom line

All things considered, despite some drawbacks, stock-based compensation is still an attractive proposition for an employee as it allows them to make a huge “bet” at the grant date stock price of a company without laying out any capital at all.

If the stock surges like Nvidia’s, then the employee could be set for life. However, if the stock fails, employees still get the cash portion of the annual pay package.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I have a vested interest in Okta. Holdings are subject to change at any time.

What Do Job Cuts Mean For Shareholders?

Job cuts can have both positive and negative consequences for a company

Recently, Meta Platforms Inc (NASDAQ: META) announced that it would cut around 5% of its global workforce. I was discussing this with a friend of mine, who is also currently working for Meta and we talked about some of the pros and cons of job cuts from the perspective of shareholders.

Let’s start with some of the pros.

Canceling unvested RSUs

When Meta cuts jobs, it also cancels all unvested restricted stock units (RSUs) that would have vested over time had the employee stayed on. The cancellation of unvested RSUs reduces the dilution from stock-based compensation.

Bear in mind, the number of RSUs granted is based on the stock price back when the RSUs were granted, and not when they vest. Back in 2022, Meta granted a huge number of RSUs as refreshers because of its lower stock price. For context, Meta granted 59 million RSUs in 2021 (when its stock price was high) but because of the refreshers and low stock prices in 2022 and 2023, Meta granted 107 million and 109 million RSUs in 2022 and 2023, respectively.

Cancelling some of these unvested RSUs will reduce dilution. In addition, hiring new employees and granting new RSUs will not result in as much dilution because Meta’s stock price is now around 7 times higher from the lows seen in 2022.

Getting better talent/ motivate existing employees

Meta cut jobs based on performance. By cutting low performers and hiring new employees, Meta could potentially improve the quality of its talent.

It also keeps current employees on their guard and creates an environment where employees work hard to ensure that performance reviews are good. This prevents employees from simply coasting through work and collecting wages without adding much value to the company.

Reducing the wage bill

Wages are one of the largest expenses for a company such as Meta. Although it is likely that Meta will eventually replace the employees that were removed, the company seems intent on keeping the team lean.

In 2022, Meta cut 11,000 employees, or 13% of its workforce and in 2023, the company cut an additional 10,000 employees as it strived for a “year of efficiency”.

For perspective, Meta’s head count declined from 86,482 in 2022 to 74,067 in 2024, despite revenue climbing 41% in two years from US$116.6 billion to US$164.5 billion. This, together with operational leverage, resulted in net profit margins rising from 20% in 2022 to 38% in 2024.

But, employee cuts could potentially end up with undesirable side effects. Here are the cons.

Lower risk taking

Cutting staff based on performance can lead to less risk-taking and innovation. This is because if the employee embarks on a more innovative but risky project that ends up failing, his or her performance may be considered poor.

This may lead employees to be less innovative or to take a safe approach when it comes to projects, creating an environment of lower innovation.

Internal competition

Another potential side effect is employees may start competing with each other. This may result in less collaboration and senior staff may be less willing to train new employees as they view them as competitors to their job.

This can create a toxic work environment.

Final thoughts

Job cuts are difficult for those impacted. However, it may also be a necessary way for companies to reduce expenses and to ensure that the company remains competitive.

Looking from the lens of a shareholder, I believe job cuts can be a good thing if done correctly and can also lead to more efficiency, more profits and eventually more dividends.

However, my discussion with my friend has also opened my eyes to some of the negative impacts of workforce reduction. Companies that do layoffs need to consider these factors and try to ensure that some of these potential negative side effects do not have a huge impact on the company.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I have a vested interest in Meta Platforms Inc. Holdings are subject to change at any time.

The Pitfalls of Using IRR

IRR is a useful calculation but it has its limitations.

The internal rate of return (IRR) is a commonly used metric to estimate the profitability of an investment. It can be used to assess whether an investment is worth making or not. It is also used to assess the performance of investment funds, such as venture capital and private equity funds.

However, an IRR can be somewhat misleading and actual returns can differ significantly from what the IRR shows you. This is because the IRR only calculates the return on investment starting at the point when cash is deployed. In many funds, cash may not be deployed immediately, which results in a cash drag that is not accounted for in the IRR calculation.

The IRR also makes an assumption that the cash generated can be redeployed at the calculated IRR rate. This is often not the case.

Here are some examples to illustrate these points.

Cash drag

Venture capital and private equity funds are unique in that investors do not give the committed capital to a fund immediately. Instead, investors make a commitment to a fund. The fund only asks for the money when it has found a startup or company to invest in; this is called paid-in capital, which differs from committed capital.

To calculate returns, venture capital and private equity funds use the IRR based only on paid-in capital. This means that while the IRR of two venture funds can look the same, the actual returns can be very different. Let’s look at two IRR scenarios below:

	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5	IRR
Fund A	-$1000	0	0	$2000	0	0	26%
Fund B	0	0	-$1000	0	0	$2000	26%

Both Fund A and Fund B have an IRR of 26%. The difference is that Fund A deployed the capital straight away while Fund B only found an investment in Year 3. Investors in Fund A are actually much better off as they can then deploy the $2000 received in Year 3 into another investment vehicle to compound returns. Fund B’s investors, meanwhile, had a cash drag with committed capital that was not deployed in Year 1 and 2, and this drag is not recorded in the IRR calculation.

Wrong assumptions

The IRR formula also assumes that the cash returned to investors can be redeployed at the IRR rate. As mentioned above, this is not always the case. Take the example below:

	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5	IRR
Investment A	-$1000	$300	$300	$300	$300	$300	15.2%
Investment B	-$1000	0	0	0	0	$2025	15.2%

In the above scenario, both Investment A and Investment B provide a 15.2% IRR. However, there is a difference in the timing of cash flows. Investment A provides cash flow of $300 per year while Investment B provides a one-time $2025 cash flow at the end of Year 5. While the IRR is the same, investors should opt for Investment B.

This is because the IRR calculation assumes that the cash flow generated can be deployed at similar rates as the IRR. But the reality is that oftentimes, the cash flow can neither be redeployed immediately, nor at similar rates to the investment.

For instance, suppose the cash flow generated can only provide a 10% return. Here are the adjusted returns at the end of Year 5 for Investment A

	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5	IRR
Investment A	-$1000	$300	$300	$300	$300	$300	15.2%
Investment A (adjusted)	-$1000	0	0	0	0	$1832	12.9%
Investment B	-$1000	0	0	0	0	$2025	15.2%

I calculated $1832 by summing up the cash flows with the extra returns generated by investing the cash flows at a 10% rate. As you can see, after doing this, the returns generated from investment A now fall to just 12.9% vs the 15.2% previously calculated.

The bottom line

Using the IRR to calculate investment returns is a good starting point to assess an investment opportunity. This can be used for investments such as real estate or private equity funds.

But it is important to note the limitations of the IRR calculation. It can overstate or understate actual returns, depending on the timing of the cash flows as well as the actual returns on the cash generated.

A key rule of thumb is that the IRR is best used when cash can be deployed quickly so that there is minimal cash drag, and when the cash generated can be deployed at close to the IRR of the investment. If this assumption does not hold true, then a manual calculation of the returns of the investment need to be made by inputting the actual returns of the cash generated.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I do not have a vested interest in any companies mentioned. Holdings are subject to change at any time.