Sunday, February 26, 2023

Shades of Jim Chanos: Former FT Alphavillain Jamie Powell Highlights A Big Problem For Stripe (plus CAC 40 outperformance)

From Mr. Powell's Twitter feed:

In the second of two links to NZZ's TheMarket.ch in Feb. 23's, "A Number of Inflationary Forces Will Remain in Place For a Long Time"— Former BIS Chief Economist (plus a driveby from Jim Chanos on Tesla) Mr. Chanos said, in response to a couple of the interviewer's queries:

....Do you spot companies where there could be fraud involved?

At year end 2022, 60% of our portfolio by capital showed some sort of questionable accounting or outright fraud. The biggest fraud is hiding in plain sight which is the misuse of pro forma accounting, in particular in Silicon Valley where companies are adding back all kinds of expenses – especially equity-based compensation – to the P&L statement. Uber's CEO was recently crowing about their adjusted profitability, but Uber is actually losing money. Or take GE. They put out a press release on their earnings two weeks ago that had 16 pages of adjustments. So what is the real earnings number? Pro forma accounting is really misleading, particularly when it comes to share-based compensation because of its dilutive nature.

Share-based compensation was also an issue in 2000.

Right, and there was no stock option expensing until 2006. The share count has gone up dramatically recently, and it gets worse when stocks drop because companies then issue even more shares from their underwater options, as they did by 2003. A company having 100 mio. shares outstanding in 2000 had 1 bn. shares outstanding by 2006. Coinbase will show $500 mio. in revenues for the quarter just ended, while their share-based compensation will be $400 mio. That’s 80% of Q4 revenues. I think we’re going to look back on that and say the regulators should have stepped in and stopped these questionable reporting practices....

Finally, a comparison of Frances's CAC40 index and the S&P 500:

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