When a company posts earnings above and beyond what was expected by Wall Street analysts, it is likely to see its stock soar. The Street loves to see companies that are doing better on their earnings than what was expected. Even better is when a company can both post great earnings and revenues all at the same time. Paypal has been posting these great earnings, but the way that they get to them may not be how you think.
Paypal rewards a lot of its loyal employees with stock based compensation. That is not necessarily unique among large companies, but the way in which they run their figures may be. The company selects to not count the stock based compensation towards its overall earnings figures. It uses non-GAAP revenues and earnings when it posts a report out to Wall Street.
Rules have required that stock compensation be counted as an expense for companies for a very long time. It makes sense that it should be an expense since the stock has value. Employees elect to receive at least some of their pay in stock. When they do this, they are receiving something of value for all of their hard work.
The technology companies have long battled to have the ability to display their earnings without the stock compensation weighed in as a factor. The New York Times reports that the companies lost that battle overall. The companies wanted to eliminate an expense from their balance sheets by just totaling things up in a different way. They have not yet been permitted to do that, but some companies still do in the short term. They have to add back in those expenses at a later date, but that is long after the value of the stock has risen on their original earnings reports (without the expense included).
Different companies have gone about this different ways. Facebook and Alphabet (the parent company of Google) have decided to start showing their earnings with the expense included. They want investors to know the true cost of running their business. Paypal is still leaving investors in the dark so to speak. Then again, it has worked out pretty well for them as the stock has risen about fifty percent just since the beginning of the year.
The major takeaway for anyone considering a technology stock investment is to contemplate how the company is presenting its earnings to you, and what the real earnings numbers might in fact look like.