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.
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.