The Viscious Circle - How A Lousy Stock Performance Drives A Great Company Into The Ground
Indulge me a moment. I'm seeing a negative trend here.
Nvidia is a great company, truly innovative with serious technological expertise. But the stock performance is truly lousy. Now how does lousy stock performance drive a great company into the ground, you ask?
First let's isolate on one salient fact......The weighted average of all un exercised employee stock options at Nvidia is $14.48. This isn't something new. Other than the brief period in the 1Q of 2011, it has been the case. Now why should we care about underwater employee stock options?....we are investors and traders right. Not employees....OK there may be a few employee message posters but not many I would think.
To put it simply...the main retention tool for keeping employees is stock options. When these don't pan out...i.e. stay underwater employee retention is harder and other tools are used which are listed below:
1) Restrictive Stock Units or RSUs are used. These guarantee the employee some income upon exercise because the basis is zero cost.
2) Cash compensation in the form of salaries and cash bonuses are increased.
3) 401K match programs or enhanced.
From a shareholder's perspective each item is a negative IMHO for the following reasons:
1) RSU's provide ZERO incentive to move the stock price....Employee's are essentially guaranteed income because of the zero basis...Note: Nvidia is issuing the RSU's in a much greater amount than it was in the go go years.
2) Cash compensation in salaries and bonuses increase OPEX...the very thing that WS analysts does not like in a flat revenue environment.
3) 401K match program increase OPEX too. Nvidia just instituted a 401k match. Hard to believe but they didn't have one before 4Q 2012.
Now all of these items are inconsequential if the stock price goes up. Who cares says the shareholder then? Right! But when the stock price doesn't go up and costs and employee compensation is going especially for management then there is a disconnect!
So what about the vicious cycle......It's simply this increasing Opex in a flat to down revenue environment drives the stock down.
But investing for the long term is what's happening you say....Keep the faith. Well of course....in the end all will be well. But in the meantime WS looks out a couple of quarters and says....."Show me the money" and the stock goes down.....employee options further underwater and HR institutes more programs to retain employees and OPEX goes up and the circle repeats.
Until what? The bottom.......and all those bells, whistles, and horns go off(Nvidia design wins, earnings beat, guidance upside, WS turns bullish and you can buy a few cents off the bottom.
When that will be and at what stock price no ones knows. Certainly no one that posts on this message board can be sure 100%. Only Nvidia management and right now there silence speaks louder than words!
In the meantime trade write those calls and sell those puts!!!!!!