Learn the stock market › Sectors › Lesson 6 of 6
Key numbers for software companies
Software companies in numbers
| Company | Gross margin | Research | P/S |
|---|---|---|---|
| Adobe | 89.3% | 18.1% | 3.6 |
| Cadence Design Systems | 86.4% | 33.4% | 14.3 |
| Palantir | 82.4% | 12.5% | 53.0 |
| Intuit | 80.2% | 15.7% | 4.3 |
| Salesforce | 77.7% | 14.4% | 4.0 |
| ServiceNow | 77.5% | 22.3% | 6.9 |
| Synopsys | 77.0% | 35.1% | 9.2 |
| Palo Alto Networks | 70.4% | 22.2% | 22.4 |
| Microsoft | 67.9% | 10.7% | 11.4 |
| Oracle | 65.8% | 15.2% | 5.0 |
| Middle of all 101 companies | 57.0% | 13.0% | 5.0 |
Why a software company looks different
A high gross margin. The gross margin is 77.6% in the middle, against 57.0% for all the largest companies. What is sold is a license or a subscription, not a thing that has to be made. Servers and support cost money, but little against sales. How the gross margin is counted is in the lesson on margins.
Much goes to development. 16.9% of revenue goes to research and development in the middle, against 13.0%. The program has to keep getting better, or a competitor takes the customers.
P/S instead of P/E. In the middle price-to-sales is 8.0, against 5.0 for all the companies. Sales grew 16.2% in the middle in the latest year, against 7.7%. A fast-growing company often spends most of its gross profit on growing more, so profit stays small and P/E says little. The market then pays for sales and what they may become. How much growth is worth to the number is worked out in the lesson on what growth is worth.
What the table does not show
Many software companies sell subscriptions. Then investors also follow how many customers stay and how much they pay each year. Those numbers are in the companies' own reports, but each company counts them its own way. A high P/S assumes growth lasts, and when it slows the multiple can fall fast.
Test yourself
A software company has an 80% gross margin but makes a loss. How can that be?