After calculating the free cash flow of operating assets, what academic finance teaches you is to subtract the operating assets by total debt add cash on balance, and then use the result divided by total shares outstanding to get the stock price.
However, if you check “Stock compensations in SG&A” in my previous post , you can find that the stock
compensations are claims on part of future cash flow and that analysts' and
accountants’ actions cannot reflect the actual cost of stock compensation.
Since calculating the market value of debt
and cash is easier for me, I decided to calculate the value of Oracle stock
compensation first.
Employee stock options
When estimating employee stock options, we need to
calculate the present value of:
How much stock options did the company pay before
How much stock options does the company have now
How much stock options we estimate the company will issue
in the future.
Previous stock options:
The good thing is that Oracle has
included previous stock compensation cost as the operating expense, so when we
use the operating profit margin(operating income/revenue) to estimate future
operating income with the forecasted revenue, we have factored in the previous
stock options.
Figure 1
Attention!:
I do want to give you a heads-up. If you check the picture below, part of stock compensation goes to R&D expenses. That’s why in my last post, I only included the Non-stock compensation R&D ($6640 for 2023 and $5586 for 2022, for example) when I calculated adjusted operating income, reinvestment rate, return on capital, and growth rate.
Including stock-based compensation will distort these ratios because the company paid real cash when it spends on R&D, but the cost of stock-based compensation depends on the timing and the stock price.
Figure 2
Current stock options.
We start from the company’s annual
report to find clues as usual. And I found two pieces of information below.
The company mentions that it has 37
million shares reserved for employees' stock option to issue in the future, while
it has issued 2 million per share in 2023,2022,2021, respectively.
However, the second picture shows
that the possible stock compensation, including performance-based and
restrictive stock-based stock rewards is 300 million shares. Including the 300
million obviously will largely undervalue the company since that is just a
“possible” future stock compensation, and the company has the freedom to issue
stock rewards or not.
In addition, if you search RSU
(restricted stock unit) in my previous post, you can find that RSU
has much fewer effects on the company’s equity than the employee stock options.
Figure 3
Figure 4
Whenever
I feel lost in valuing the company, I sometimes just read through its current
and previous annual reports to see if I can find any clues. And I quickly found
that from 2013-2023, each annual report has a similar content as Figure 3,
and I collected the information below.
Figure 5
As you can see, the path
of how Oracle issues employee stock compensation is quite stable, and it will
take about 14 and half years for Oracle to issue the leftover stock
compensations. And if you check my previous post about why the company issues employee stock options, you
can infer that the company will issue fewer and fewer or none stock
compensations as it gets older. So, I think we can use the current 37 million stock
compensation left as Oracle’s total employee stock options.
Value of Oracle’s employee stock
I mentioned before that when employees exercise stock
options, they will buy the stock at a lower price than the market price, bring
more cash to the company by purchasing the stock, and reduce the total shares
outstanding. So, usually, we will need to estimate the present value of stock
compensation with the average exercise price and maturity.
However, we get lucky with the Oracle stock
compensation if you check Figure 3. Oracle’s stock option gives the
employees option to purchase the company’s stock at a price per share at 95%
of the market value of Oracle stock as of the end of the semi-annual option period.
What happened to many companies with employee options is that they may issue
the stock option with an exercise price at $60 but the market stock price hit $100
during the exercise period, reducing the company’s equity when their employee
exercise their options. But Oracle’s stock compensation largely reduces such
loss.
Since the employee can only exercise the option at 95%
of market value, I can take a shortcut by multiplying the 37 million*5%=1.85
million shares. Because employees only pay 5% less than us (equity investors),
we can just add the 1.85 million to the total shares outstanding.
RSU (restricted stock Unit)
You can check my previous post
about what the RSU is and how to value it.
As of May 31,2023, the
company has 152 millions RSU on balance, so we will subtract the Oracle’s total
shares outstand from 152*(1-illuqid discount)=152*(1-27.5%)=110.2 million
shares, based on the Illiquid discount rate from NYU database.
Adjusted Oracle stock share
Right now we have
estimate the value of all stock options, and when we calculate the Oracle stock
price, we can just get whatever the current total shares outstanding and adds
these two number. From Yahoo Finance, the current shares outstanding as of 8/20/2023
is 2.71 Billion.
So Oracle stock price=
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