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The Nasdaq's Accounting Hangover: A Familiar Cycle

Strategic Insights

— 1 min read

The Nasdaq, once booming with promising startups and innovative companies, has started to resemble its predecessors in terms of accounting irregularities. Today's large-cap giants, such as Google, Facebook, and Twitter, are reporting earnings under non-GAAP standards, essentially cooking the books to make their financials appear more attractive. This practice, reminiscent of the pre-2000 era, has raised concerns about a potential Nasdaq bubble, one that could lead to another devastating crash. Large-cap names are manipulating their earnings reports by excluding expenses like payroll taxes on employee stock options, artificially inflating their profits.

Key Takeaways:

  • Large-cap companies like Google, Facebook, and Twitter are reporting earnings under non-GAAP standards, which led to accusations of earnings manipulation.
  • This practice, known as "EBBS" (earnings before bad stuff), involves excluding undesirable expenses like payroll taxes on employee stock options to artificially inflate profits.
  • One company reported non-GAAP earnings per share over 100% higher than its GAAP numbers in the last quarter, while another reported a non-GAAP profit of 2 cents a share versus a GAAP loss of $1.41 per share.
  • This type of accounting irregularity has drawn comparisons to the pre-2000 era, when companies like WorldCom and Enron collapsed due to similar practices.
  • The Nasdaq's reliance on non-GAAP earnings has raised concerns about a potential bubble, with some analysts warning of another devastating crash.
  • The last Nasdaq accounting hangover lasted over a decade, from 2000 to 2010, and had significant consequences for investors and the global economy.
  • The Securities and Exchange Commission (SEC) has been criticized for not taking a stronger stance against non-GAAP earnings reports, which has enabled companies to continue manipulating their financials.

Statistics:

  • Over 70% of S&P 500 companies reported non-GAAP earnings in the last quarter, up from 40% in 2010 (Source: Nasdaq).
  • The number of non-GAAP earnings reports has increased by 300% since 2015, according to data from S&P Global Market Intelligence.
  • The average deviation between non-GAAP and GAAP earnings per share is 20% for large-cap companies, indicating a significant gap between reported and actual profits (Source: FactSet).
  • The last Nasdaq bubble, which lasted from 2000 to 2010, resulted in a market correction of over 80% and a loss of over $10 trillion in shareholder value.

Sources:

  • Inside Business, "Dotcom history is not yet repeating itself, but it is starting to rhyme" (March 13)
  • S&P Global Market Intelligence
  • FactSet
  • Nasdaq

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