A Case Study on the Corrosive Effects of Stock-Based Compensation & The Need for a More Thoughtful Calculation of Owner’s Earnings
Henry W. Schacht, CFA
Devotion Capital Management
Founder & Chief Investment Officer
March 24, 2026
Buybacks are often presented as a straightforward benefit to shareholders. If a company repurchases its own stock, each remaining share is thought to represent a larger ownership stake in the business. Stock repurchases can be a powerful driver of per-share value.
But that logic embeds a number of assumptions, including that the share count is actually going down and that continuing shareholders gradually own more and more of the company.
In practice, that is not always what happens. Many companies issue significant amounts of stock to employees as part of compensation. That is common, and entirely legal. But it also means new shares are constantly being created. To prevent the share count from rising—and the dilution from becoming obvious—companies often repurchase stock in the open market to offset those issuances. The result is that cash leaves the business, but ownership for outside shareholders does not meaningfully increase.
In those cases, buybacks are not enhancing/increasing shareholder ownership—it is simply maintaining.
The distinction as to the nature of a share repurchase matters. Let’s say Shareholder X owns 100 shares and those 100 shares represent a Y percentage ownership in the company. If throughout the year, the company issues stock to employees and subsequently neutralizes that issuance via stock buybacks, Shareholder X appears no worse off. Without the buyback, Shareholder X would own less than Y percent of the company. The buybacks in this case would keep Shareholder X at that same Y level, but there has been no gain in ownership and the money used for repurchases is gone. The repurchase did not increase Shareholder X’s stake in the business. It merely offset the dilution caused by shares granted to employees.
Stock issuance may be treated as a non-cash expense for accounting purposes, but economically it is very real. One way or another, the expense is eventually recognized in economic fact. If the company must spend cash to neutralize it, outside owners are paying for it either way.
The intern learned a valuable lesson. Investors should be skeptical of buybacks viewed in isolation. What matters is not the size of the repurchase authorization or the dollars spent, but the result. Did shares outstanding actually fall? Who benefited? And what did it cost shareholders to stand still?
This brings us to a current example that is dramatic – Pinterest.
Pinterest (ticker: PINS) is a compelling business. It is a platform company—exactly the type of model we are attracted to—where incremental users and engagement can drive meaningful growth in revenue and cash flow with limited incremental cost. As the user base grows, more of each additional dollar of revenue can fall to the bottom line. There is real operating leverage embedded in the model.
The balance sheet reinforces the story. As of December 31, 2025, Pinterest held $2.467 billion of cash, cash equivalents, and marketable securities and carried no meaningful debt. Financial risk is low and flexibility is high.
The business is also capital-light. In 2025, Pinterest generated $1.284 billion of operating cash flow and spent just $32.4 million on property and equipment. On the surface, this is a business that appears to convert a very high percentage of its earnings into free cash flow.
Then enters Elliott Management.
This month, Pinterest announced a $1 billion strategic investment from Elliott alongside $2 billion of near-term share repurchases and a new $3.5 billion repurchase authorization.
The optics are powerful: a cash-rich, debt-light, capital-light platform business, now paired with an activist investor and an aggressive capital return program.
But Elliott’s involvement is not necessarily good for anyone other than Elliott. Activists are highly sophisticated and often very successful—but their incentives are not always aligned with long-term outside shareholders. Financial engineering, accelerated buybacks, and short-term performance improvements can benefit an activist’s entry point and exit timing without necessarily improving the underlying economics of the business for ongoing owners.
Nonetheless, on paper, everything about Pinterest looks right, which is why Devotion started looking at the company in earnest.
On February 12, 2026, Pinterest reported fourth quarter and full year 2025 results. The headlines are exactly what management would want investors to focus on. The company generated approximately $1.2 billion of free cash flow (FCF) for the year. Global monthly active users grew 12%. And the company continued to execute on large share repurchase programs. –Pinterest Q4-25-PressRelease.
With a market value of roughly $12-13 billion (678 million shares at ~$19 each), over $1.2 billion of FCF (and growing), a debt free balance sheet, and over $2 billion in NET cash, Pinterest looks cheap… and VERY compelling.
The metrics highlighted by management screen well, get highlighted in press releases, and are repeated in investor presentations and in the financial press. Growth in users. Strong free cash flow. Capital being returned to shareholders. On the surface, it checks every box. But those headline numbers deserve a closer look – using the company’s own financial disclosures.
Let’s take a look at some exhibits pulled from Pinterest’s most recent SEC filing the 2025 10K:
Inline Viewer: Pinterest, Inc. 10-K 2025-12-31
Exhibit 1 shows the capital structure, including two classes of stock (one super-voting class and the A shares that actually are available for us to purchase) and the year-end share counts.
Exhibit 2 is the 2025 year-end balance sheet, highlighting the company’s cash position and lack of debt.
Exhibit 3 is the 2025 income statement, showing revenue, net income, and basic and diluted shares outstanding over time.
Exhibit 4 is the 2025 statement of cash flows, where stock-based compensation, cash flow from operations, capital expenditures, and share repurchases are all laid out.
Each of these exhibits, in a way, supports the headline narrative, but taken together, they tell a different story. Let’s explain with the help of the table below.
Stock-based compensation (SBC) is compensation paid to employees in the form of equity—shares or options—recorded as a non-cash accounting estimate of the value of that compensation. Because it is treated as a non-cash expense, it is added back to net income in arriving at cash flow from operations and free cash flow, but that logic is flawed because the economic cost to outside shareholders is very real.
Pinterest is a stark example of how stock-based compensation can quietly consume every dollar shareholders think they have earned.
In short, Pinterest pays employees – in part – with stock, which is a non-cash accounting expense, and then spends cash to buy stock back to neutralize the dilutive effects of issuing employee shares in the first place. The cost doesn’t disappear – it just shows up in a different line. The company appears FAR more cash-generative than it actually is because part of the labor expense is being routed through the capital structure.
Because of this, investors must rethink free cash flow in a world of stock-based compensation. It is not a clean proxy for owner’s earnings.
For more financially advanced readers: Free Cash Flow is often calculated with a distinction between capital expenditures that are maintenance vs. new investment. Maintenance capex restores the asset base to “zero” theoretically. What we are suggesting is something called maintenance buybacks or stock repurchases that restore the ownership base. If the ownership base expands due to SBC (dilution of outside shareholders), that is a cost. Whether management/board of directors chooses to spend cash to neutralize that dilution or not is almost irrelevant. The cost exists either way – explicitly or implicitly. The question is therefore, how much stock must be repurchased to neutralize SBC and return the capital structure to “even”. Maintenance buybacks are just as real as maintenance capex—and just as costly – often more so
Why “free cash flow” isn’t free to shareholders. The “free” in free cash flow is like “free and clear”. Real free cash flow is money that can be spent discretionarily on expansion, share repurchases, acquisitions, dividends, and the like. Pinterest’s FCF fails this test because without repurchases, the shareholder base would have expanded considerably over these last 3-4 years. Just as a company must reinvest maintenance capital expenditures to return property, plant, and equipment to a normal state, the same must be done to the capital structure that has been altered, not by wear and tear, but by the dilutive effects of stock-based compensation.
Stock-based compensation shrinks the ownership of outsiders. Repurchases that neutralize this can be seen as “mandatory”. In short, free cash flow (strictly calculated) does not reflect the corrosive effects of employee pay that is not in cash. This is an accounting illusion hiding in plain sight.
What the big print giveth, the small print taketh away. Or in this case, what the headlines giveth, the details taketh away.
Put another way, once all the cash and cash flows are accounted for in totality, what’s left for the owner(s)?
With Pinterest, it is remarkable to see nearly $4 billion of free cash flow over the years effectively “disappear” into share repurchases that do not accrue to outside shareholders. The magnitude of that capital—generated, then consumed just to maintain the same ownership—is breathtaking.
Over almost any time period observed, Pinterest spent more than 100% of its Free Cash Flow to neutralize stock-based compensation. This is real compensation being paid to employees.
Over the seven-year period from 2019 through year-end 2025, Pinterest, Inc. generated approximately $3.96 billion of free cash flow. During that same period, the company spent approximately $4.04 billion on equity—through a combination of share repurchases and cash used to settle stock-based compensation.
The result for our calculation of owner’s earnings over that time period:
Free Cash Flow: $3.96B
Cash Spent on Equity: $4.04B
Net to Shareholders: –$76M
The tell: Despite billions of dollars spent, shares outstanding increased from approximately 570
million to 678 million.
The relationship between these figures we have calculated is striking. For Pinterest, over time, cumulative free cash flow of approximately $3.96 billion, stock-based compensation of approximately $3.76 billion, and total equity spend of approximately $4.04 billion all converge within a narrow range of roughly $3.75 to $4.00 billion. That is not an accounting requirement— it is an economic outcome. In effect, a substantial portion of the company’s reported free cash flow is ultimately required to fund equity compensation.
Taken together, the exhibits show a business with many attractive qualities. Pinterest has delivered significant growth in cash flow from operations in recent years and requires very little capital expenditure to support that growth, resulting in substantial reported free cash flow. At the same time, however, the company relies heavily on stock-based compensation to reward employees. Shares are issued on an ongoing basis, increasing the share count, while repurchases have ramped up to offset that dilution.
As a result, a substantial portion—indeed, more than 100% over the past seven years—of reported free cash flow has been used to repurchase stock. Despite billions of dollars spent, basic, diluted, and year-end share counts are roughly flat to modestly higher over time. The conclusion is straightforward: little to no cash has ultimately accrued to outside shareholders, as the repurchases neutralized dilution. This is not a discretionary share buyback designed to consolidate ownership or reward shareholders by repurchasing shares opportunistically.
Our Interpretation – How to View True Owner’s Earnings
Two perspectives on owner’s earnings emerge:
- Free Cash Flow minus SBC
A proxy that treats stock-based compensation as an economic expense –
suggests modest positive owner’s earnings over time - Free Cash Flow minus Total Equity Spend
A cash-based view that includes all repurchases:
Shows that essentially all free cash flow is consumed
In some years, more than all free cash flow is required
The second view reflects the actual cash required to maintain ownership levels. In this respect, we believe this approach is superior.
Investors often view share repurchases as inherently shareholder-friendly. In theory, buybacks reduce the number of shares outstanding and increase each investor’s ownership stake in the business. But that assumption deserves scrutiny in the case of Pinterest. The company is indeed spending meaningful sums repurchasing stock. Yet the total number of shares outstanding has not meaningfully declined. The reason appears straightforward: stock-based compensation is an enormous component of employee pay, and newly issued shares are largely being absorbed by repurchase activity. In other words, the cash leaving the company through buybacks is not materially consolidating ownership for outside shareholders. Instead, it is largely offsetting dilution created by equity compensation. The buybacks are real, but their economic effect is very different from what many investors assume
This distinction matters when evaluating free cash flow. By accounting definition, the company is generating free cash flow. But whether that cash functions as “owner earnings” depends on what happens after it is produced. When large amounts of equity are issued to employees and repurchases are required simply to keep the share count stable, a significant portion of that cash is effectively funding compensation. Cash generation alone does not determine whether outside shareholders benefit. The destination of that cash matters just as much as its calculation.
The situation becomes more complicated when viewed alongside the company’s transaction with Elliott Management. Elliott is widely regarded as one of the most sophisticated activist investors in the market. Yet the structure of its investment appears to include preferred or convertible-style economics that allow participation in upside while providing additional protections not available to ordinary shareholders. That may be perfectly rational from Elliott’s perspective, but it introduces another layer of complexity for common investors trying to understand how capital allocation decisions ultimately affect them. The arrangement does little to address the underlying issue of heavy stock-based compensation and its effect on ownership.
Ultimately this becomes a question of intent. Buybacks can be extremely powerful when they are executed with the goal of consolidating ownership at prices below intrinsic value. But when repurchases primarily function to absorb dilution from equity compensation, their economic purpose shifts. Cash leaves the business, yet ownership does not become more concentrated for outside shareholders. Investors evaluating the company should recognize that distinction.
We reached out to Investor Relations at Pinterest multiple times seeking clarification on how management evaluates repurchases relative to dilution from stock-based compensation. Our interest was genuine. The company generates impressive cash flow and operates a platform-style business that, in many respects, should be highly attractive to long-term investors. But if the free cash flow ultimately funds equity compensation and repurchases merely offset dilution—leaving outside shareholders with little increase in their ownership stake—then the impressive cash generation begins to look like a Pyrrhic victory. In this case the economic beneficiaries appear to be Pinterest employees, and perhaps now Elliott through its structured investment. So far, outside shareholders have seen little benefit beyond a temporary bounce in the share price following news of Elliott’s involvement. Our inquiries to Investor Relations went unanswered.
In investing, what matters is not just how much cash a business produces, but who ultimately benefits from it.
For Pinterest, stock-based compensation (SBC) is high. This is their choice as a way to remunerate their employees. This puts a constant pressure on shares outstanding – thus diluting outside shareholders. Thus, SBC converts into a recurring cash obligation through buybacks OR the dilution becomes obvious via an ever-expanding share count.
The business looks like a high FCF, asset-light business with a growing/recurring revenue stream, but economically, it behaves differently because the equity used to pay employees leads to free cash flow being used to buy back or neutralize that activity. The result: there is no residual cash for outside owners.
Despite $4 billion in share repurchases, Pinterest shares outstanding have INCREASED, not decreased. The cumulative effects of share-based compensation are devastatingly clear. Owner’s earnings using our methodology are actually negative over the same period of time as a result.
Going forward, we are going to pin this concept to our board – ask if a share repurchase/buyback is shareholder-friendly – designed to reward shareholders with a return of excess cash OR is it a repurchase of shares handed to employees – labor expenses wearing a buyback costume? Is it even excess cash being used?
Put another way, consider a simple thought experiment. Imagine owning 100% of Pinterest over this period—every single share. The company generates nearly $4 billion of free cash flow. But along the way, it issues shares to employees, increasing the ownership base. To get back to where you started—to maintain your 100% ownership—you must spend approximately $4 billion repurchasing the shares issued to employees. After all of that activity—after the cash is generated and then spent just to be back where you started (100% ownership)—what did you actually earn on your capital?
Nothing.
This brings us back to our reason for investigating PINS shares in the first place. Should investors be attracted to Pinterest because of its free cash flow and aggressive share repurchases? On the surface, the answer appeared to be yes. Further analysis changed our mind.
And Elliott Management may be a catalyst, but the question of “who benefits?” remains. Elliott has advantages (and an investment structure with Pinterest) not shared by outside common shareholders. Ironically, the involvement of Elliott might make things even less clear for outside owners of the stock.
The key question is not whether the company generates free cash flow, but rather, does the free cash flow ultimately belong to the owners of Pinterest stock. The answer—at least over the past several years—appears to be no.
Devotion to Economic Reality.
Disclosure: Neither the author, nor Devotion clients own Pinterest shares.
