Snowflake’s business is selling its own stock to employees

A favorite accounting trick for publicly-traded companies is to exclude stock-based compensation from EBITDA and cash flow to paint an optimistic picture of company performance. For example, if a company’s net income is negative, but its stock-based compensation is larger than its net loss, adding back stock-based compensation in your financial statements can give you positive operating cash flow. The (incredibly-oversimplified) rationale is, “We’re not actually spending money, we’re just issuing new shares to employees. Why waste time focusing on stock-based comp?” Neat trick, right?

A different, but related, trick that companies love is to announce share buybacks to distract investors from high levels of stock-based compensation. Basically, company management will announce that it’s buying back, like, $500 million of stock, which sounds really good! Except, if the company’s stock-based compensation is more than $500 million over that period, it’s still a net-negative for investors. Think about it like this: while, yes, stock-based compensation is not a “cash expense” for the company, it is a very real expense for shareholders, because their stake in the company gets diluted.

On Wednesday, Snowflake, a data warehouse provider that went public in 2020, reported its Q2 2025 (its 2024 fiscal year ended on January 31, 2024) earnings, and the results were a masterclass in redistributing wealth from shareholders to employees. Snowflake’s stock-based compensation for the quarter was ~$373 million, or 43% of its $869 million in revenue. This matches a trend from the last three years, where Snowflake’s full-year stock-based compensation was 55%, 43%, and 44% of revenues in 2022, 2023, and 2024, respectively.

For context, Snap, which has long been cited as one of the more egregious examples of high stock-based compensation, had stock-based compensation worth 20% of revenue last quarter, compared to 30% last year.

Snowflake announced a $2.5 billion share buyback plan that expires in March 2027, which sounds nice, except the company’s total stock-based compensation over the last three years was approximately $2.8 billion. If this quarter’s equity compensation of $373 million is held constant through March 2027, more than $4 billion in new equity will be issued, and equity comp has only increased since the company went public. Buybacks sound nice, but they don’t mean much for investors if they fail to offset new issuances.

Snowflake lost ~$318 million on the quarter for a -36% profit margin, but if you removed stock-based compensation, the company would have posted a ~$56 million profit. It’s no surprise that investors are growing tired after three years of Snowflake awarding more than 40% of revenue as equity compensation as it remains  an unprofitable company with slowing revenue growth. The stock fell as much as 13% today, and it’s down more than 50% from its IPO.

If Snowflake’s new CEO wants to fix his stock price, he should start by reconsidering insiders’ equity grants.