When I first discovered these boards a few years ago, there was more discussion regarding P/E or at least earnings in general (I remember when Saul’s favorite stock was SKX). I know Saul’s philosophy has changed slightly along with most others that follow this board with the main emphasis being on revenue growth rate. While some of the board’s highest conviction stocks are growing incredibly fast, they are also increasing losses. How long do these companies continue to grow until they need to start turning a profit? Revenue growth is going to slow inevitably, it already has for some of the stocks we follow. Is there an inflection point where eventually earnings (or losses) have to become a factor? My two best performing stocks overall have been AYX and SHOP (I am still holding SHOP from the 20’s). AYX is profitable and SHOP has decreased losses the last three quarters. On the other side of the table you have TWLO, MDB, OKTA, etc. I have been hesitant to invest in these solely because of increased losses. Maybe this is a totally stupid reason and I am crazy, but my gut keeps telling me to wait.
Does the fact that these are high margin companies with increased spending being almost solely sales and R&D help negate some of the concern? I’ve seen some threads discussing return on increased sales spending recently, obviously that has to be a big part of it as well. If spending on sales is continuing to increase, is growth keeping up?
How long do these companies continue to grow until they need to start turning a profit? Revenue growth is going to slow inevitably, it already has for some of the stocks we follow. Is there an inflection point where eventually earnings (or losses) have to become a factor?
In short, the companies need to outgrow their cost of customer acquisition which is usually around 18 months. After that point the customer goes from being a liability to becoming profitable, and becoming immensely profitable at that. What all these SaaS companies want is to grow as fast as they can, cover their CAC, and then reap the rewards. The thing that is counter intuitive is that these companies actually want large losses in the beginning because that means the inflection point will be much more meaningful down the road.
Very different business model from Sketchers, or LGI Homes.
Hi invain. Consider the gross margins on the companies discussed on this board. Many are 70% and up.
From Saul’s “Oh! This time it’s different???” post…
Any company with 75%, 85% or 95% gross margins can make a profit whenever they decide to! All they need to do is slow down spending on grabbing every new customer they can grab while the grabbing is good. Personally, I’d rather they keep grabbing all those customers now, from whom revenue will keep growing for the indefinite future.
Thanks for the responses. I wasn’t thinking about costumer acquisition cost being over that long of a time period. It does make sense when you think about it, and that’s a pretty big point if customer base is growing fast. Also makes sense why net retention rates are discussed a lot.
I figured margins have to do with a lot of it, as was mentioned any of these companies could drastically cut R&D or sales and post a “profit” (obviously they wouldn’t want to at this point).
The other thing I’d point out is your reference to “increased losses” for TWLO, MDB and OKTA. Unless I’m missing something I’m not seeing that. I’m actually seeing decreased losses or even a small profit, especially as a total percentage of revenues. Below are the last three years of Operating and Net Income for each company you mentioned:
Please keep in mind these are only my notes from earnings releases and I’d welcome others checking my math. However, these figures don’t have me as worried about the way the profit/loss numbers are trending for the companies you mention.
“Get the information yourself. I suggest that you don’t get earnings (or other information that’s important to you), off Yahoo, or eTrade, etc, but get earnings off the company’s earnings press releases, which you can always find on their Investor Relations site. You just don’t know what Yahoo’s computer is grabbing.”
The other difference is your Yahoo numbers look like GAAP figures. Most of the write ups here use non-GAAP. I use non-GAAP since I believe that’s a more accurate way to gauge what’s happening with these companies. The second part of the Knowledgebase has a great write up on the difference: https://discussion.fool.com/knowledgebase-newly-revised-part-2-3…. Just scroll down to the section marked ## Adjusted (Non-GAAP) vs. GAAP Earnings.
Hope that helps explain why I had different numbers.