NVIDIA’s investor materials released last week showed that its fiscal year 2026 revenue reached a record high of $215.9 billion, and fourth-quarter revenue exceeded expectations to reach $68.1 billion. Several words in the CFO’s comments even surprised some close observers of the company.
“Beginning in the first quarter of fiscal 2027, we will incorporate stock-based compensation expense into our non-GAAP financial measures,” Chief Financial Officer Colette Kress said in her prepared comments. “Stock-based compensation is a fundamental component of our compensation plan to attract and retain world-class talent.”
This may sound like some financial detail, but it’s actually a noteworthy move. Like many technology companies, Nvidia has historically excluded stock-based compensation from the so-called “adjusted” financial numbers it releases along with its official Generally Accepted Accounting Principles (GAAP) results. These adjusted numbers, especially a company’s earnings-per-share numbers, are known as non-GAAP numbers and are often used by Wall Street to assess performance and set goals for the coming quarter.
Critics, including Warren Buffett, have long argued that ignoring stock compensation, while perfectly legal, understates a company’s true cost of paying its employees and overstates profitability. But many companies insist that by stripping out fees, they can give investors a more accurate picture of a business’s core performance: Logically, stock-based compensation isn’t cash, and it’s difficult for outside analysts to correctly estimate each quarter’s total in valuation models.
What’s clear is that the same company’s financial results can vary depending on how stock compensation is calculated, sometimes even converting bottom-line losses into “adjusted profits.” Software maker Asana, for example, recently reported a fourth-quarter net loss of $32.2 million, but after deducting the cost of stock compensation, payroll taxes on employee stock transactions and other items, its “non-GAAP net income” was $19.9 million.
For Nvidia, the world’s most valuable company at $4.4 trillion, hiring coupled with big pay raises and equity gains are driving up the cost of stock-based compensation. Not to mention, competition for AI-related talent is quite fierce, making the recruitment environment extremely competitive. Nvidia’s stock price rose 35% from approximately $4.7 billion in fiscal 2025 to $6.4 billion in fiscal 2026. Meanwhile, the company’s stock price has surged, up 60% in the past year alone, although it fell slightly after its latest earnings report last week.
That’s why Nvidia’s announcement that it will include stock-based compensation starting this quarter was so surprising.
“First of all, I want to express my appreciation for moving the stock company into non-GAAP,” Melius partner and head of technology research Ben Reitzes told Nvidia management on last week’s earnings call. “I think it’s a great move.”
But why did Nvidia voluntarily abandon accounting strategies that helped the company polish its performance?
Jay Ritter, a professor emeritus at the University of Florida, said Nvidia’s profits are so high that excluding stock compensation costs doesn’t really provide that much benefit. “For Nvidia, it’s surprising that it has such a small impact, mostly because of how profitable they are,” Ritter said in an email. “The better a company’s true profits are, the less it needs to fudge the numbers.”
For example, in 2020, Nvidia reported non-GAAP annual operating income that was 28.3% higher than GAAP operating income, excluding stock-based compensation. However, doing the same for Nvidia’s 2025 results only resulted in a 4.7% improvement.
Ritter, now director of the IPO program at the University of Florida’s Eugene Brigham Department of Finance, Insurance and Real Estate, points out that by 2025, Nvidia will have about $116 billion in after-tax profits with 42,000 employees, and profits of about $3 million per employee will be almost unaffected by including $150,000 in stock compensation per employee.
If including stock compensation charges allows Nvidia to score brownie points on Wall Street without making too many sacrifices, the same can’t be said for all of its rivals.
Melius analyst Reitzes followed up with a research note on Monday analyzing Nvidia’s accounting changes. Including stock charges is standard practice for Mag 7 stocks, making it a little easier to compare Nvidia to Alphabet, Amazon, Apple and Microsoft now, according to the company’s analysis. But compared to other semiconductor stocks, Nvidia is doing well.
“If investors force Nvidia’s semi-finished competitors to follow its lead and include stock option expenses in non-GAAP [earnings per share]”Nvidia has a clear advantage,” Reitzes and his co-authors wrote in the note. Including the charge in non-GAAP earnings would have reduced earnings per share for companies such as Broadcom, AMD and Marvell by 14% to 20%, according to Melius. Nvidia’s decline was about 3%.
“Moreover, if these peers need to rein in stock competition due to investor pressure, Nvidia will have an advantage in recruiting talent and completing acquisitions because the impact of these grants can be easily absorbed compared to peers,” Reitz and others wrote.
When asked what prompted Nvidia to make the change at this time, the company said wealth its official documents.
The changes made by Nvidia are consistent with structural compensation design issues that appear to have plagued Berkshire Hathaway Chairman Buffett for decades. To be clear, Berkshire does not own Nvidia stock. According to its latest annual report, the company holds approximately $298 billion in assets, with core assets including Apple, American Express, Coca-Cola and Moody’s. But Buffett has long expressed dissatisfaction with the design and practice of executive compensation at other companies. Buffett wrote in a 1992 letter to his chairman that the rationale for ditching stock compensation because it was an estimate was unimpressive, to say the least.
“Shareholders should understand that companies incur costs when they deliver something of value to another party, not just when cash changes hands,” Buffett wrote. “Furthermore, it is both foolish and cynical to suggest that an important cost item should not be recognized simply because it cannot be precisely quantified.”
In 2018, he wrote that Wall Street bankers and corporate CEOs came up with an “adjusted EBITDA” metric that excluded “a variety of all-too-real costs.”
“Managements sometimes assert that their companies’ stock-based compensation should not be counted as an expense,” Buffett wrote, before interjecting: “What else — Gift From shareholders? “
This story originally appeared on Fortune.com
