Print Major Internet stocks are running as investors prepare for a crowd of earnings.
Berkshire Hathaway's Charlie Munger this week referred to that metric as "bulls--t earnings. Pinterest used it 25 times the same day.
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The term showed up 33 times in Lyft's report this week, while Yelp included it 39 times in its earnings release after the close of trading on Thursday. To get to EBITDA, companies take bottom-line net income or lossbased on generally accepted accounting principles GAAPand then add back in items they had counted as costs but that don't affect their cash position. For example, as equipment and software ages, the depreciating value counts as an expense even though it doesn't involve the outlay of capital, so EBITDA lets you show how earnings would look without depreciation.
Some internet companies, in particular, take the further step of reporting adjusted EBITDA, providing a glimpse of their earnings if they didn't have to account for stock-based compensation. That's a major expense in Silicon Valley, where equity is such a big recruiting tool and a way to pay founders and top executives.
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Munger's comments centered around the excessive use of EBITDA by companies at a time when there are an increasing number of red flags in a internet earnings and technology market that's been on the rise for over a decade. Critics of EBITDA and other non-GAAP accounting metrics have long argued that you can make any business look good when you start stripping out costs, especially when there's no standardization.
And when it comes to tech companies that raised billions of dollars in private capital before going public, the trend towards funny numbers is another sign that valuations got way ahead of business fundamentals.
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A Yelp spokesperson declined to comment. The company said it will approach break-even on an adjusted EBITDA basis for the year as it invests gross profits back into the business.
As you can see above, the technology sector can be boom or bust. The same is true of individual companies and market segments within the space.
There's also a lot of variability when it comes to how much companies rely on equity-based compensation. There's a big divide between that number and GAAP results.
What Is the Average Price-to-Earnings Ratio in the Internet Sector?
To turn the EBITDA number positive, Uber is counting on global expansion on the rides side of the business and high-priced premium offerings to finally offset losses in internet earnings and technology cash-burning areas like food delivery. EBITDA can be useful for companies like Internet earnings and technology that lose money not only on the bottom line, but also on an operating basis.
Tom White, an analyst at D. Davidson, covering Uber and others in the internet sector, said companies will go up the income statement until there's a positive number that can help investors value the business.
Uber and Lyft didn't respond to requests for comment and a Pinterest spokesperson declined to comment. Needham's Brad Erickson, who covers internet services, said Wall Street has gotten used to these metrics and is savvy enough to analyze the companies appropriately. Based on their performance on the public markets, he's right. Uber and Lyft are still trading well below their IPO prices from last year, and Pinterest is under where it closed on the day of its debut.
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Yelp, which went public inhas lost value over the past five years. Pinterest, Uber, Lyft and Yelp market performance CNBC In regards to Munger, Erickson recalled that he and his partner, Warren Buffetthave been famously skeptical of internet companies for many years, and it's caused them to lose out on some of the great winners of the last couple decades.
Some of their decisions related to valuations, and others, they admitto not understanding the businesses.