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I recently read how Salesforce is worth nearly $50 billion but has never turned a profit[1][2]. [1] https://en.wikipedia.org/wiki/Salesforce.com https://en.wik

by gdw2 11y ago

I recently read how Salesforce is worth nearly $50 billion but has never turned a profit[1][2]. [1] https://en.wikipedia.org/wiki/Salesforce.com https://en.wikipedia.org/wiki/Salesforce.com [2] http://www.npr.org/sections/money/2015/10/09/447249562/episode-656-bubblelicious http://www.npr.org/sections/money/2015/10/09/447249562/episo...

lubos 11y ago
Salesforce did a lot of acquisitions worth billions of dollars. Looking at their financial statements, net loss for last FY was 250MM but depreciation and amortization was over 700MM. In other words, the loss they show is just a paper loss. They make money. Unlike Enron which was making paper profit but they were actually losing money.
- pedrocr 11y ago
  >Looking at their financial statements, net loss for last FY was 250MM but depreciation and amortization was over 700MM. In other words, the loss they show is just a paper loss. They make money. If they consistently do this then they're not making money. Depreciation/Ammortization is just an accounting method to distribute investments over time. If you're consistently returning a net loss it's not just a timing issue. In this case maybe Salesforce is like Amazon and continuously reinvests free cash flow so they don't return a profit to shareholders and instead reinvest it into new business. Is that what you mean?
  - genericpseudo 11y ago
    It means the business has positive free cash flow; it takes in more money than it spends in a year (i.e. it's not going bankrupt), but the paper value of assets it owns (largely intangible goodwill from acquisitions) is written down, meaning that they take a loss. This is generally a win, if you're expanding, because it means you pay no tax on your free cash.
    - pedrocr 11y ago
      >It means the business has positive free cash flow Note that this isn't necessarily true. You can have negative Net Income, positive EBITDA but negative FCF (what really matters).
  - lubos 11y ago
    Yeah, that's exactly what I mean. Wall street rewards growth over profits so incentives for Salesforce are to keep purchasing businesses which at least break-even (e.g. Heroku) which in turn show growth in revenue but don't necessarily translate into growth in profits. As long as Salesforce keeps buying these businesses, they can keep showing paper loss forever without actually being in any danger of running out of cash. And while they are doing this, their shareprice might double or triple. It sounds crazy that it actually works but I'm not the one who is going to argue with markets.
    - pedrocr 11y ago
      >It sounds crazy that it actually works but I'm not the one who is going to argue with markets. It can be a great tactic if the businesses you build/buy are the same your shareholders would buy with the dividends you'd pay out since you'll save them some taxes. Since the mother company can also hope to add some value to the businesses it buys the end result can be quite interesting. Buffet's Berkshire is based on this kind of setup.
    - mbesto 11y ago
      > Wall street rewards growth over profits That's not true, or at least it's only partially true. In the end, Wall street values discounted cash flow. As Bill Gurley has said: > So growth is good, correct? There is a reason to save growth for last. While growth is quite important, and even thought we are in a market where growth is in particularly high demand, growth all by itself can be misleading. Here is the problem. Growth that can never translate into long-term positive cash flow will have a negative impact on a DCF model, not a positive one. This is known as “profitless prosperity.” In other words, as long as you can show sustainable double digit growth, you can afford to value based on growth. If you don't and all of the sudden you can't maintain a positive DCF, the Street will hit you hard. SFDC, Amazon, etc are all teetering on the brink of collapse and equally becoming the next Walmart/Exxon. [0] - http://abovethecrowd.com/2011/05/24/all-revenue-is-not-created-equal-the-keys-to-the-10x-revenue-club/ http://abovethecrowd.com/2011/05/24/all-revenue-is-not-creat...
- marme 11y ago
  showing a paper loss when you are actually profitable means you are overspending short term. It is not healthy for a business. It is no different than a person with a good job and salary who is hundreds of thousands in debit. You are basically spending future money that you have no earned yet. In the case of startups that future money is VC money
  - pookeh 11y ago
    If they are spending their own money then they are not in debit...it is only if they are borrowing. Either case it is a paper loss except in the former case the example you give is reversed.
pbreit 11y ago
If you know how to create value by investing money, you should do that. If you've run out of ideas or expertise, by all means, profit.

by gdw2 11y ago

lubos 11y ago

Salesforce did a lot of acquisitions worth billions of dollars. Looking at their financial statements, net loss for last FY was 250MM but depreciation and amortization was over 700MM. In other words, the loss they show is just a paper loss. They make money. Unlike Enron which was making paper profit but they were actually losing money.

pedrocr 11y ago
>Looking at their financial statements, net loss for last FY was 250MM but depreciation and amortization was over 700MM. In other words, the loss they show is just a paper loss. They make money. If they consistently do this then they're not making money. Depreciation/Ammortization is just an accounting method to distribute investments over time. If you're consistently returning a net loss it's not just a timing issue. In this case maybe Salesforce is like Amazon and continuously reinvests free cash flow so they don't return a profit to shareholders and instead reinvest it into new business. Is that what you mean?
- genericpseudo 11y ago
  It means the business has positive free cash flow; it takes in more money than it spends in a year (i.e. it's not going bankrupt), but the paper value of assets it owns (largely intangible goodwill from acquisitions) is written down, meaning that they take a loss. This is generally a win, if you're expanding, because it means you pay no tax on your free cash.
  - pedrocr 11y ago
    >It means the business has positive free cash flow Note that this isn't necessarily true. You can have negative Net Income, positive EBITDA but negative FCF (what really matters).
- lubos 11y ago
  Yeah, that's exactly what I mean. Wall street rewards growth over profits so incentives for Salesforce are to keep purchasing businesses which at least break-even (e.g. Heroku) which in turn show growth in revenue but don't necessarily translate into growth in profits. As long as Salesforce keeps buying these businesses, they can keep showing paper loss forever without actually being in any danger of running out of cash. And while they are doing this, their shareprice might double or triple. It sounds crazy that it actually works but I'm not the one who is going to argue with markets.
  - pedrocr 11y ago
    >It sounds crazy that it actually works but I'm not the one who is going to argue with markets. It can be a great tactic if the businesses you build/buy are the same your shareholders would buy with the dividends you'd pay out since you'll save them some taxes. Since the mother company can also hope to add some value to the businesses it buys the end result can be quite interesting. Buffet's Berkshire is based on this kind of setup.
  - mbesto 11y ago
    > Wall street rewards growth over profits That's not true, or at least it's only partially true. In the end, Wall street values discounted cash flow. As Bill Gurley has said: > So growth is good, correct? There is a reason to save growth for last. While growth is quite important, and even thought we are in a market where growth is in particularly high demand, growth all by itself can be misleading. Here is the problem. Growth that can never translate into long-term positive cash flow will have a negative impact on a DCF model, not a positive one. This is known as “profitless prosperity.” In other words, as long as you can show sustainable double digit growth, you can afford to value based on growth. If you don't and all of the sudden you can't maintain a positive DCF, the Street will hit you hard. SFDC, Amazon, etc are all teetering on the brink of collapse and equally becoming the next Walmart/Exxon. [0] - http://abovethecrowd.com/2011/05/24/all-revenue-is-not-created-equal-the-keys-to-the-10x-revenue-club/ http://abovethecrowd.com/2011/05/24/all-revenue-is-not-creat...
marme 11y ago
showing a paper loss when you are actually profitable means you are overspending short term. It is not healthy for a business. It is no different than a person with a good job and salary who is hundreds of thousands in debit. You are basically spending future money that you have no earned yet. In the case of startups that future money is VC money
- pookeh 11y ago
  If they are spending their own money then they are not in debit...it is only if they are borrowing. Either case it is a paper loss except in the former case the example you give is reversed.

pbreit 11y ago

If you know how to create value by investing money, you should do that. If you've run out of ideas or expertise, by all means, profit.