Shares of Snap (NYSE:SNAP) are trading near an all-time low about a year and a half after going public. Even if you're a long-term buy-and-hold investor who pays no attention to daily or weekly swings in stock prices, the downward trajectory of Snap shares should concern you.
Former chief security officer Jad Boutros pointed out that anybody who's been hired at Snap in the last four years has lost money on their stock grants -- and many new people have since come on board.
Today, Snap's share price dipped below what it was when I received my grant four and a half years ago. Back then, Snapchat had almost two orders of magnitude fewer employees. (~40 vs ~3,000). Boy.— Jad Boutros (@secplusplus) October 5, 2018
Considering Snap relies heavily on stock-based compensation, the falling stock price could have a negative impact on its employee retention. If Snap starts seeing an increase in employee turnover, it could lead to greater inefficiencies in its operations.
What's more, a declining stock price combined with significant stock-based compensation can lead to further share dilution for existing shareholders. That's bad news for everyone with a stake in the company, employee or not.
Stock-based compensation addictions
Snap paid out $2.6 billion in stock-based compensation last year. A lot of that comprised rewards to engineers and other personnel when the company made its IPO.
Even taking a step back in 2018, the company has paid out $289.6 million in stock-based compensation through the first six months of the year. That said, second-quarter stock-based compensation fell to $156.4 million from $245 million last year. The drop in stock-based compensation, however, has more to do with Snap's accounting method combined with the slide in head count than it does with any concerted effort to reduce stock-based compensation.
At its current pace, Snap is on par with the stock-based compensation Twitter (NYSE:TWTR) was paying out in 2016 before it took steps to cut back on stock grants as part of its compensation. Interestingly, Twitter faced the same problem Snap currently faces as its stock price tanked in 2016. The company was able to turn things around by cutting its workforce (a measure Snap has already taken) and reducing its reliance on stock-based compensation. Today, it's reporting profits on a GAAP basis, and stock-based compensation continues to decline.
Many in Snap's workforce received shares last year that vest over several years. The compensation they thought they received is now about half as valuable as it was. That's not great for employee morale.
While Snap's stock-based compensation expense fell in the second quarter compared to the same period last year, it actually ended up issuing more shares because of the lower stock price. Snap's share count increased by 19.2 million across its three classes of shares from the end of the first quarter to the end of the second quarter. The share count increased by just 18 million shares during the same period last year.
Since going public, Snap's share count has climbed 8.3% in the 15 months between the end of its first quarter as a publicly traded company and the end of the second quarter this year. That's about on par with what happened to Twitter shares when it had its most aggressive year of stock-based compensation in 2015.
As Snap continues to grow its share count, each share current stockholders hold entitles them to a smaller portion of whatever profits the company eventually makes (if that ever happens). In other words, Snap has to produce greater net income in order to produce earnings-per-share growth. (Conversely, while the company is producing a net loss, more shares make the EPS number look better, even though things might be getting worse.)
As Snap's stock price hovers around its all-time low, investors have two big problems. First, existing employees at the company may decide to seek greener pastures and abandon their unvested shares as they decrease in value. Secondly, long-term investors are seeing massive share dilution, decreasing the long-term value of the shares they're holding.