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Accounting is not real life. The dollars in revenue in your annual report are not exactly the same as the dollars in Till. This is pretty much OK and often good from an investor’s perspective. However, sometimes financial numbers are obscured rather than illuminated. Elon Musk’s X is a great example.
Social Network stocks recently changed hands at a $44 billion valuation, including debt. This is the same amount that the mask paid to buy it – when it was still called Twitter – in 2022. This is surprising for two reasons. Firstly, tech stocks have been sliding recently. Secondly, some time ago, X investors who were not registered with Longer had written down the value of their investment in just a small portion of their amount.
How did the mask do that? There are various explanations. For one thing, today’s X is not the same as yesterday’s Twitter. Of course, one change is the boom that is intervening with artificial intelligence. Musk’s own AI project, Xai, is worth up to $75 billion if proposed funding is realized. X investors get a slice of their business.
There are also signs that X is getting better. The company has publicly declared an EBITDA of $1.2 billion, people told the Financial Times it was close to 2021 totals. That may suggest that musk makes X more efficient.
Catch: These EBITDA numbers are said to be “roughly adjusted.” This creates the question of whether X’s performance looks better than when there are fewer non-aggressive presentations.
In a sense, it is always a pitfall with EBITDA, an accounting manufacturing designed to smooth out lumps and bumps. This reflects a simplified view of what is left from revenue after deducting the company’s costs and ignores investments in what we plan to use over time.
However, adjustments stacked on top can cloud your photos even more. Typically, companies also rule out one-off expenses – sparking debates about what that means – and stock-based compensation. Adjustments can be quite large as tech companies keep cash and push fairness freely out to motivate employees.
For companies with the NASDAQ Composite Index, EBITDA, excluding stock-based compensation, was up 7%, based on an analysis of S&P Capital IQ data. Investors who stitch together Palantir’s EBITDA will find that if the stock payments are put aside, it will triple. Cybersecurity company CrowdStrike will increase by about 10 times. Datadog is 6x.
Ebitda is not a standard number, so you can adjust it to this occasion. Companies can report any revenue “previously.” Think EBITDARE (real estate costs), EBITDAO (optional costs), and – horrifyingly – EBITDARD (research and development).
For X, we still don’t know what those EBITDA adjustments are and how wild they are. Investors trading unlisted stocks are probably sophisticated enough to run their own complex models. One of them may be Musk himself, Bloomberg reported Tuesday.
But it flags another reason to treat the rating with caution. Just like in Fine Art Auctions, you only need to choose a deal between individual investors, and only a few agree. When Twitter was still public, its market capitalization of over $400 billion was the result of tens of millions of stock trades a day. Just as accounting is not a real life, $44 billion is not real money at the moment.
john.foley@ft.com
