Alibaba's bottom line crimped by stock-compensation costs
What's true in Silicon Valley, Seattle and other U.S. tech hubs is also true in China: Technology workers don't come cheap.
Even as third-quarter sales at Hangzhou-based Alibaba Group surged more than expected thanks to the rapid growth of e-commerce in its home country, its profits were hurt by the same expense that routinely carves into the bottom line of its U.S.-based Internet rivals.
Alibaba's share-based compensation expense exploded in its most recent period to $490 million, causing operating income and net income to drop substantially from a year earlier.
The company's operating income fell 17% to $708 million, even though sales surged 56% to $2.7 billion.
The spike in stock-compensation charges chopped the company's operating margin almost in half, to 25.8% of revenue from 47.9% a year earlier.
Alibaba's net income dropped even more, falling 38.6% to $494 million.
And net income attributable to ordinary shareholders, including all the U.S. retail investors who bought the company's IPO shares in September, fell 39.1% to $485 million.
It's easy to think that Alibaba's surge in employee compensation charges is a one-time event driven by the company's initial public offering in the USA.
And such costs usually do diminish as a percent of sales the longer a company's shares are publicly traded and the larger it gets, as measured by revenue.
But not always.
In fact, these charges have continued to put a large dent in the bottom line of U.S. Internet companies — which routinely use stock options and equity grants to attract executives and rank-and-file workers — for years or even decades.
In its most recent period, for example, Facebook had $353 million in share-based compensation expense – more than two years after its May 2012 IPO.
That represented 11% of its $3.2 billion in sales for the quarter.
Twitter, which went public last November, had $170 million in stock-compensation costs during the third quarter.
That was equal to 47% of revenue and almost wholly responsible for the company's $175 million net loss for the period.
Amazon's third-quarter share-based compensation costs were $377 million, or 18% of sales – 17 years after the company went public near the start of the dotcom boom.
Those charges – driven mainly by the high cost of tech-worker compensation packages in its hometown of Seattle – were responsible for the overwhelming majority of Amazon's $437 million quarterly net loss.
In a coincidence worth noting for Alibaba shareholders, both the Chinese firm and U.S-based Amazon saw stock-compensation charges eat up 18% of revenue for the quarter ended in September.
To be sure, Alibaba earned almost half a billion dollars in net income during the period, while Amazon had almost that much in losses.
And tech investors have long ignored such costs, driving Amazon's share price more than 30-fold higher over the last two decades.
Yet as long as Alibaba's share price remains high enough to encourage employees to cash out their equity awards, look for stock-compensation costs to take a big bite out of the company's bottom line.
John Shinal has covered tech and financial markets for more than 15 years at Bloomberg, BusinessWeek,The San Francisco Chronicle, Dow Jones MarketWatch, Wall Street Journal Digital Network and others. Follow him on Twitter: @johnshinal.