A key to the tech industry is providing stock options and other equity incentives to employees. It can be critical in attracting and retaining top-notch talent.
Then again, equity compensation can also weigh on the earnings. In fact, this is often something that can make it tough for early stage companies to reach profitability.
But interestingly enough, there’s an important court case that could provide some relief. Oh, and it could mean a nice boost for the bottom lines of companies like Alphabet Inc (GOOG, GOOGL), Microsoft Corporation (MSFT) and eBay Inc (EBAY).
Here’s the background: Intel Corporation (INTC) has been embroiled with a dispute with the IRS. And as should be no surprise, the details are fairly complicated. The crux of the dispute is how to account for the sharing of costs for equity compensation with U.S. companies and foreign subsidiaries, which have much lower tax rates.
Interestingly enough, the case has been winding through the courts since 2003 (INTC got involved through its acquisition of Altera last year). But a resolution may come soon, since the IRS has made an appeal to the Ninth U.S. Circuit Court of Appeals. Oh, and the odds for a win for Intel look promising. Keep in mind that the U.S. Tax Court made a unanimous ruling in favor of the company and the Ninth Circuit has also been favorable on this topic in prior cases, according to a report from the Wall Street Journal.
Of course, when it comes to the U.S. court system, nothing can be taken for granted. After all, look at the problems that Yahoo! Inc (YHOO) has had with its tax situation of its massive holding of Alibaba Group Holding Ltd (BABA).
What’s more, the issue of tax breaks from foreign shelters has become a hot political issue — and should remain so in this year’s topsy-turvy election season.
Intel Stock … Or Google Stock?
Now, even if there is a favorable ruling, this does not mean that you should rush to buy Intel stock. While the company will like get a nice boost for its earnings, there are still many issues the company must deal with. Let’s face it, the PC business appears to be in a secular decline and INTC has failed to make a successful transition to mobile.
Even more worrisome is that there are now signs that Intel’s main growth driver, the data center business, is decelerating. So during the latest quarter, INTC reported a modest 1% increase in overall revenues.
Rather, a much more interesting play is actually Google stock. Based on estimates from the Wall Street Journal, the company could get at least $3.5 billion in extra profits.
Besides, Google stock should also benefit from major positive tailwinds, such as the tidal shift to mobile, digital ads and online video. Of course, the company has top-notch properties that have allowed for tremendous success, such as YouTube, Android, Maps and so on. At the same time, there are strong investments in next-generation opportunities like autonomous cars, Nest and biosciences.
What’s more, Google stock also has a reasonable valuation, with a forward price-to-earnings multiple at about 17, which compares to 26X for Facebook Inc (FB) and 24X for Twitter Inc (TWTR). This is pretty good in light of the fact that the company has beat earnings estimates for the past three quarters.
All in all, while betting on the outcome of the INTC litigation is certainly dicey, it could be yet another reason to like Google stock.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
