Revenue growth is the most important thing. Profits don't matter.

That's what you need to convince yourself of in order to invest in today's high-flying technology stocks, particularly those selling enterprise software. (NYSE:CRM), the leader in the CRM market, hasn't recorded a generally accepted accounting principles profit since 2011, yet its stock has more than doubled over the past three years as revenue soared. And recent IPO Box (NYSE:BOX), while it grew its revenue by 74% in 2014, has been burning through cash at a staggering rate.

These companies are growing too fast to be profitable -- that's the common, trite explanation for their massive, persistent losses. Companies like Salesforce and Box, the argument goes, are plowing so much cash into growing their businesses that investors can't realistically expect profits. Someday in the future, once these companies have fulfilled their growth potential, sales and marketing expenses can be slashed, economies of scale can be realized, and huge profits will inevitably follow.

Investors have been all too willing to accept this story in recent years. Salesforce is valued at $50 billion, despite just $5.4 billion in revenue in 2014 and a four-year streak of losses. And Box, despite having an operating margin of negative 73% in 2014, trades at nearly 10 times sales.

It turns out, though, that a quick look into the past debunks this notion that fast-growing tech companies can't be profitable.

Fast growth and big profits
went public in 1986, just one year after launching the first version of Windows. According to Microsoft's IPO prospectus, the company recorded $140.4 million of revenue in 1985, up 44% from the previous year. Microsoft was already profitable at this point, with $24.1 million in net income in 1985, good for a net income margin of 17%.

Before 2004, stock-based compensation wasn't counted as an expense under GAAP accounting, so Microsoft's profits might be a bit overstated. But if we compare Microsoft's results from 1985 to Box's results today, it's clear these two companies aren't in the same league. If we add back stock-based compensation to Box's net income for 2014, so that the number is comparable to Microsoft's results from 1985, Box's adjusted net income is still a loss of $136 million.


Revenue in Millions

Net Income Plus Stock-Based Compensation in Millions

Market Capitalization

Microsoft, 1985



~$500 million at IPO 

Box, 2014



~$2 billion

While Microsoft spent $42 million on sales and marketing in 1985, or about 30% of revenue, Box last year spent $196.1 million, excluding stock-based compensation, or about 90% of revenue. Box's other costs were also much higher than Microsoft's were in 1985, leading to its massive loss.

Now, you could argue the business models are different. While Microsoft sold software licenses, Box sells subscriptions, meaning revenue is recognized over a period of time, not all at once. All of that spending goes toward securing future revenue, and that can make things look worse than they really are in the short term. Surely, once Box becomes bigger, generating billions of dollars in sales per year, and its growth rate inevitably slows, the profits will begin to flow.

Or maybe not. Salesforce, which reached $5.4 billion in annual revenue in 2014, close to what Microsoft managed in 1995, still reported a $263 million loss last year. Microsoft was wildly profitable in 1995, even after subtracting the effects of stock-based compensation:


Revenue in Millions

Net Income in Millions

Market Capitalization

Microsoft, 1995



~$50 billion at end of 1995 

Salesforce, 2014



~$50 billion

Microsoft's net income adjusted for a $410 million pre-tax charge related to stock-based compensation, a number provided by the company in its annual report. Reported net income was $1,453 million for 1995.

Much like Box, Salesforce spends far more on sales and marketing than Microsoft did in the past. Microsoft spent $1.895 billion on sales and marketing in 1995, about 32% of revenue, while Salesforce spent $2.757 billion in 2014, about 55% of revenue. Salesforce only expects to grow revenue by 21%-22% in the current fiscal year despite this heavy spending, while Microsoft's revenue increased by 46% in 1996. Even in 1999, when Microsoft's revenue approached $20 billion, the company managed revenue growth of 29%, and its profits were growing relentlessly each year.

Growing too fast to be profitable? Gimme a break!
It's far easier to sell $1 for $0.95 than it is to sell $1 for $1.05. High-flying software companies such as Box and Salesforce are growing rapidly, but they're spending like drunken sailors to do it. What good is revenue growth when it doesn't produce profits? What good is market share when it's won in an unsustainable way?

Spending heavily and losing money might be fine for start-ups, but Salesforce and Box haven't been start-ups for a long time -- Box is 10 years old and Salesforce is 16 years old. Blindly accepting that fast-growing companies should be losing money, and valuing them based on revenue growth instead of profits, is unlikely to turn out well in the long run.

Investors who bought Microsoft throughout its history were buying a solid, profitable, and growing company. Investors buying high-flying software companies like Salesforce and Box are building castles in the air.