How to forecast shares outstanding
Hi All, coming from PE I never had to do this before. How do you typically forecast shares outstanding, both basic and FD? Is it a function of SBC?
For the options, how do I know what will be ITM or not in the future? I’d be forecasting the future stock price, which seems circular…
Thanks!
del
Interested. How do you forecast / model SBC as well? How do you know?
Ask yourself, how much alpha can I generate if I get the forecasted share count right? Then ask yourself, what is the probability that I can predict the factors that influence the share count? If either answer is a negative then you know it’s not worth your time worrying about.
It’s unlikely that a company has so many employee options outstanding that get exercised with any real regularity that it would influence the share count upwards. Now repurchases on the other hand can be much more impactful.
Thank you! I agree this won’t help me generate any alpha, however, won’t the interviewer want to know how I got it (particularly if SBC is high)?
This is not true for tech at all. Looking into whether or not employees are likely to get a refresher and therefore investors will experience dilution is 100% on my checklist. However, I don't go through the rigamarole of modeling out the dilution exactly as it happens, GAAP SBC expense, etc. Instead, I make an assumption around SBC as % of OpEx over time as well as historic relationship between SBC and dilution.
Kinda matters A LOT if you trying to get a normalized earnings power of a non-profitable tech business, knowing share count can compound at LSD-MSD at a lot of these SaaS names
The stock market is unpredictable
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