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Comment by markbao | Hacker News Reader

In a somewhat unrelated note, has anyone seen Salesforce.com's (NYSE:CRM) P/E ratio? http://finance.google.com/finance?q=CRM

P/E 98.02 and Forward P/E 319.20.

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In a SaaS company the cost of sales is recognized immediately, but revenue is only recognized one month at a time. The company might spend $3K on marketing and sales to make $15K over the life time of the customer. The cost of sales up front, while the revenue won't be recognized for months or years. Thus when the company is in rapid growth phrase, earnings will be practically nothing,. All cash is reinvested in sales & marketing, and the profits won't arrive until growth starts to plateau.

Of course, sometimes it turns out that the sales and marketing expense is actually more than the life time value of the customer. The company never gets to profitability, and the share price tanks. This happened to Vonage.

You're right, excellent point. Totally overlooked that.

All a matter if Salesforce's software is satisfying enough for their customers to break even and to make profit.

Did you mean: "expense is actually more" in the last paragraph?

Right, fixed now.

Does that mean the price of the stock does not represent the true value of the company?

P/E doesn't mean much for a company that is still growing fast.

Good point.

It means the value of the stock doesn't represent the value of the company assuming that the company's recent earning history is indicative of their earning potential. In a growing company, or one where for some reason or another past earnings are not a good indicator, it doesn't mean much.

Theoretically you can deduce the market's idea of how much the company will earn from the PE of such a company.

That's not unrelated at all.

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