Scott Fearon

When it comes to accounting tricks, fracking companies have nothing on Silicon Valley.

Like a lot of people in the investment world, I’m still processing David Einhorn’s speech at the Ira Sohn Conference yesterday.

In case you missed it, Einhorn demolished the fracking industry, specifically firms like Concho, Continental, EOG, Whiting, and what he called the “mother fracker,” Pioneer Natural Resources. At first, I was surprised to hear him single out Pioneer as overvalued. Just two weeks ago, I noted that it was one of the few E&P firms to come through the recent oil bust with a relatively healthy balance sheet. It’s a well-respected company in the energy industry with all sorts of positive Wall Street coverage. And yet, I have to say, Einhorn’s analysis was quite persuasive. I’m looking at Pioneer and the entire domestic fracking business in a whole new way this morning.

The speech featured a great deal of numbers and raw data, but Einhorn’s core thesis was actually very straightforward: fracked wells are not only more expensive to drill than traditional wells, their production declines at a faster rate. In other words, they require more capital investment and earn less of a return. But another part of Einhorn’s analysis intrigued me even more, because he could have easily been talking about companies thousands of miles from the energy parks of Houston and Dallas and the shale reserves of North Dakota:

“When someone doesn’t want you to look at traditional metrics,” he told the audience. “It’s a good time to look at traditional metrics.”

Einhorn was referring to the misleading “ebitdax” numbers energy companies prefer to report. Yet I couldn’t help but think of the parallels to Silicon Valley and the non-GAAP shell games that almost everyone plays down there, especially when it comes to options grants.Three companies I wrote about last week–Yelp, Twitter, and Linkedin–are particularly skilled at this options prestidigitation. Twitter just estimated that its 2015 second quarter ebitda would be $97-$102 million. Lurking within that disclosure, however, was a staggering $190-$200 million second quarter stock-based compensation charge. Full year ebitda is estimated at $510-$530M. That’s not bad, I guess, until you turn the page and see full year stock compensation charges of $650-$790M.

Warren Buffett has long been critical of excessive options grants, and for good reason. Options not only let companies artificially boost non-GAAP results, they also conveniently allow them to use the stock market to subsidize compensation expenses. Oh yeah, they’re seriously dilutive, too. The more a stock appreciates, the more shares magically appear on the market.

A day will come–hopefully sooner than later–when investors will become just as skeptical of the tech sector and its accounting methods as they are of the oil industry. It will probably take another catastrophic crash or two, but someday we’ll all figure out the plain fact that we’re being had.