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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Accounting isn’t real life. The dollar of revenue in your annual report isn’t quite the same as a dollar in the till. This is mostly OK and is often a good thing, from an investor’s point of view. But sometimes financial numbers can obscure rather than illuminate. Elon Musk’s X is a case in point.
Shares in the social network changed hands recently at a $44bn valuation including debt, the same amount Musk paid to buy it — when it was still called Twitter — in 2022. That’s a surprise for two reasons. First, tech stocks have recently been sliding. Second, not long ago, investors in the no-longer-listed X were writing down the value of their investments to a fraction of that amount.
How has Musk done it? There are various possible explanations. One is that today’s X isn’t the same as yesterday’s Twitter. One change, of course, is the intervening boom in artificial intelligence. Musk’s own AI project, xAI, could be worth up to $75bn if a proposed financing comes to pass. Investors in X get a slice of that business.
There are also signs that X itself is doing better. The company is professing $1.2bn of ebitda, sources told the FT, close to 2021’s sum — even though revenue has fallen since then. That may suggest Musk is managing to make X more efficient.
The catch: those ebitda numbers are said to be “wildly adjusted”. That raises the question of whether X’s performance looks better than it might with less aggressive presentation.
In one sense, that’s always a pitfall with ebitda, an accounting fabrication designed to smooth lumps and bumps. It reflects a simplified view of what is left over from revenue after deducting businesses costs, and ignores investments in stuff the company plans to use over time.
But adjustments piled on top can further cloud the picture. Typically, companies also exclude one-off expenses — igniting debate as to what that means — and stock-based compensation. As tech companies liberally dole out equity to preserve cash and motivate employees, the adjustment can be sizeable.
For companies in the Nasdaq Composite index, ebitda excluding stock-based compensation would have been a median 7 per cent higher, based on an analysis of S&P Capital IQ data. An investor piecing together Palantir’s ebitda would find it triples if share payments are put aside. Cyber security company CrowdStrike’s increases roughly tenfold; Datadog’s by a multiple of six.
Since ebitda isn’t a standard number, it can be tailored to suit the occasion. Companies can report their earnings “before” anything, and they do. Think ebitdare (real estate costs), ebitdao (option expenses) and — hideously — ebitdard (research and development).
In the case of X, it remains to be seen what, and how wild, those ebitda adjustments really are. The investors trading its unlisted stock are presumably sophisticated enough to run complex models of their own. One of them might be Musk himself, Bloomberg reported on Tuesday.
That, though, flags another reason to treat valuations carefully: select transactions among private investors — like fine art auctions — only need a small number of people to agree. When Twitter was still public, its $40bn-plus market capitalisation was the result of tens of millions of share trades a day. Just as accounting isn’t real life, that $44bn isn’t, for now, real money.
