Charts reveal the software companies that rely most on stock-based compensation

• Stock-based compensation at software firms now faces more scrutiny.
• Charts reveal which companies have high stock-based compensation as a percentage of revenue.
• Valuations can swing wildly when stock-based compensation is included.

Stock-based compensation, long a defining feature of the software industry, faces renewed scrutiny as investors reassess the sector amid slowing growth and the disruptive impact of AI.

The issue came into focus during a recent conversation I had with the CEO of a major public software company, who warned that the industry could be headed for a "painful financial reset."

Speaking anonymously because of the sensitivity of the topic, the executive said stock-based compensation, or SBC, has grown too large relative to future growth prospects for many software-as-a-service companies.

Recent data from analysts at Barclays and William Blair highlights how widespread the issue has become.

At some companies, stock-based compensation accounts for a striking share of revenue. Snowflake tops the list at roughly 35% of revenue, followed by JFrog at about 28% and Atlassian at around 25%. GitLab, MongoDB, and Datadog also have SBC levels above 20% of revenue, according to Barclays' analysis.

The high levels of equity compensation have become more noticeable as software stocks struggle and investors push companies to show stronger profitability.

"SBC is coming up a lot more in our investor conversations," Barclays analyst Raimo Lenschow wrote in a recent research note.

William Blair analyst Arjun Bhatia noted that Atlassian generated $1.4 billion in free cash flow during its last fiscal year. If its stock compensation had been cash compensation, its free cash flow would have been essentially zero.

Barclays examined how valuations change when stock compensation is treated as a real expense in free cash flow calculations. The results show dramatic swings for some companies.

"Adjusting for the large levels of stock-based compensation, the situation looks less rosy," Lenschow wrote.

MongoDB, for example, recently had an enterprise value of about 53.5 times the next 12 months' free cash flow, according to Barclays. When stock-based compensation is included, its earnings drop into negative territory. Atlassian's valuation multiple jumped from roughly 12.8 times free cash flow to about 88 times when SBC is included, according to Barclays. Some investors may consider this overvalued.

These dynamics put pressure on management teams to rein in stock compensation. William Blair's Bhatia said Atlassian's recent job cuts were partly tied to its effort to "accelerate its path to GAAP profitability" and moderate one of the highest stock-compensation levels in the industry.

If growth slows while equity compensation remains elevated, other software companies may face difficult choices — including layoffs — as investors seek more financial discipline across the sector.

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