Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Why It’s So Hard for to Make a Profit

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now (NYSE: CRM  ) CEO Marc Benioff and Amazon's (NASDAQ: AMZN  ) chief executive Jeff Bezos have one big thing in common: Both have perfected the art of unflinchingly telling investors that their No. 1 priority is growing their companies' top-lines, and that margins and profits don't matter much for them. For the last ten quarters or so, has returned a net loss, and the last quarter was not any different. The social enterprise Software-as-a-Service, or SaaS, provider recorded a $116.6 million net loss, close to six times the previous year's comparable quarter loss.'s CRM systems are considered higher-end, perhaps on an equal footing with Oracle's (NYSE: ORCL  ) or SAP's (NYSE: SAP  ) , while Microsoft's (NASDAQ: MSFT  ) are considered mid-range. SAP is a better comparison for since the two are pure-play enterprise software developers, while Oracle and Microsoft are both into software and hardware businesses.

Interestingly, investors always seem to give it a get-out-of-jail free pass, and bid up its share price after the latest result.

Source: CRM Data by YCharts

Strong revenue growth and Amazon have a few other things in common. Both have very strong revenue growth, accompanied by either razor thin profit margins (Amazon) or negative margins ( grew its revenue at more than three times the industry average last year-- 36.5% vs. the industry average of 10.8%.

What excited investors so much was not its big loss, but the fact that the company raised its revenue guidance for the current quarter by $100 million, the biggest quarterly revenue guidance raise for the company in its history. But the nagging question remains, why can't sweeten the deal further by growing not just its top, but bottom line too? Its profit margin has remained in the negative territory for close to two years now.

Source:CRM Data by YCharts

The biggest reason why finds turning a profit so tough is, ironically, the same reason why its top line has been growing so admirably—its sales crew. spends roughly 50% of its sales and revenues on marketing expenses, with the percentage gradually inching up higher to around 52% last year. exhibits diseconomies of scale, with its last sale getting harder than the previous one. Any sales guy will tell you that that's 180 degrees from the way things are supposed to work in the real world.You would think that something that's over-hyped as cloud computing products would be flying off the shelves, but judging from the company's high marketing expenses, it seems that the customer is playing hard to get.'s marketing and sales expenses also escalated 47% during the quarter compared to the year before, to hit $639.8 million. In contrast, its revenue rose "just" 37%. That's why the loss widened.

Piling up losses can give a company deferred tax assets, including loss carry-forwards, that can help shield its future profits from taxes. established a $149.1 million reserve for deferred taxes in 2012. That's worrying, because it in effect signaled that the company does not think it's going to become profitable anytime soon.

Peers in comparison
SAP reported results that were in line with earlier guidance. Cloud revenue was up 32% during the quarter (excluding inorganic growth from the acquisition of Hybris), with total revenue for fiscal 2013 growing in triple digits -- 121% -- from $586 million to $1.3 billion.

Microsoft's outwardly flailing demeanor can be quite deceptive--the software giant performed quite well last quarter, powered by strong Xbox One and 360 sales, with the consoles selling 3.5 million and 3.9 million units respectively. The company generated $24.5 billion in revenues from its multiple segments, and $8 billion in profit. Its commercial operations continued to thrive, while its consumer section recorded mixed results. Cloud services shot up 107%, thanks mainly to Office 365.

Oracle has in the last few quarters been disappointing investors with results that fall short of its guidance, or issuing lower guidance than consensus estimates. During the company's second-quarter fiscal 2014 earnings call, Oracle reported that its software division grew 5% and generated $6.9 billion in revenue, with software updates bringing in $4.5 billion, almost half of its overall revenue. The firm's hardware division, including hardware support, grew 2% to $714 million. Overall company revenue came in at $9.3 billion, a 3% year-over-year growth. Non-GAAP net income moved up marginally by 1% to $4.2 billion.

The industry trend, therefore, seems to be strong performance for the cloud computing segment, while the hardware segment is getting mixed results.

Conclusion has been growing its top line at an average 35% annual clip over the last five years or so, far above the industry average. It's bottom-line, however, has remained in the red. The company issued revenue growth guidance above 30% during its latest earnings call. enjoys the same equivocations as Amazon, and its investors don't seem to mind the lack of profits as long as it keeps growing its revenue briskly. Trying to short this stock would be akin to jumping in front of a speeding train.

He may be the richest man, but Bill Gates fears the cloud
There are few things that Bill Gates fears. Cloud computing is one of them. It’s a radical shift in technology that has early investors getting filthy rich, and we want you to join them. That’s why we are highlighting three companies that could make investors like you rich. You've likely only heard of one of them, so be sure to click here to watch this shocking video presentation!

Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2863441, ~/Articles/ArticleHandler.aspx, 8/31/2015 4:03:39 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Joseph Gacinga

Today's Market

updated Moments ago Sponsored by:
DOW 16,563.00 -80.01 -0.48%
S&P 500 1,975.79 -13.08 -0.66%
NASD 4,783.72 -44.61 -0.92%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/31/2015 3:47 PM
AMZN $513.98 Down -4.03 -0.78% CAPS Rating: ***
CRM $69.50 Down -0.75 -1.07% CAPS Rating: **
MSFT $43.48 Down -0.45 -1.02%
Microsoft CAPS Rating: ***
ORCL $37.23 Down -0.24 -0.63%
Oracle CAPS Rating: ****
SAP $67.37 Down -0.09 -0.13%
SAP AG (ADR) CAPS Rating: ****