Why Big Money Investors Say NetSuite's a Buy

One of the great maxims of traders and Wall Street pros is to follow the "smart money."

I'm not much for the thesis that institutional shoppers tend to make smarter investing decisions, but many of you who've read my ruminations on insider buying say you'd also like to know how the Big Money is betting. Your wish is my command.

Next up: NetSuite (NYSE: N). Are institutions bullish or bearish when it comes to this specialist supplier of online business software?

Foolish facts

Data current as of Jan. 28.

Ask most Fools if they're willing to buy stocks with a triple-digit P/E ratio and they'll say "no." (And that's putting it politely.) To these value-driven investors, there's no scenario in which it makes sense for a stock to trade for more than 100 times earnings.

They're usually right, which is why CAPS investors give triple-digit wonders salesforce.com (NYSE: CRM) and SuccessFactors (Nasdaq: SFSF) just one star each out of a possible five. Both companies are peers of NetSuite in supplying business software via the cloud, tainting the stock in Fools' eyes.

"Vaporware may be an issue [at NetSuite]. [Customer relationship management] is one thing. [Enterprise resource planning] is a completely different ball of wax, where [the] transition is very, VERY hard from embedded systems. Once someone figures out what their ACTUAL competitive advantage is, let me know," wrote CAPS investor ElBiotecnico in September.

Fair point. NetSuite specializes in ERP, which historically equates to a suite of software modules stitched together into a whole platform for running business functions. From marketing to sales management to factory automation and inventory management, ERP systems were built to address it all. NetSuite has taken this same idea to the cloud, and attracted a majority investment from Oracle CEO Larry Ellison in the process.

Institutional ownership history

Source: Capital IQ, a division of Standard & Poor's.
*Indicates the number of shares owned.

Big Money investors appear to agree with Ellison. They've been on a buying spree since the company went public. What's more, the top 25 holders have added more than 6 million shares to their portfolios since June of 2009. As of November, top owner Columbia controlled 2.8% of NetSuite's shares outstanding via its Columbia Acorn (ACRNX) fund, Morningstar reports.

Competitor and peer checkup

Source: Capital IQ. Data current as of Jan. 28.

Is the stock still worth buying? I think so. Triple-digit valuations can be deceiving, and that seems to be the case here, too. According to Capital IQ estimates, NetSuite is in pace to end 2010 with a $0.13 per share profit, nearly double that to $0.22 in 2012, and then add another 50% in 2013. This is a growth stock with a lot of growth left.

But even those numbers could be low. Like salesforce.com, NetSuite generates cash ahead of earnings via subscription sales. Clients pay for 12 months worth of online service at the beginning of each year; NetSuite then recognizes the revenue ratably.

My point? Even if accounting profits have thus far proven mostly elusive, NetSuite is a cash generator that's produced close to $11 million in free cash flow over the past year. A ballooning subscription base will lift that number further, and in the process give rise to new investing profits.

Do you agree? Disagree? Let me know you would rate NetSuite using the comments box below. You can also recommend other stocks for me to evaluate by sending me an email, or replying to me on Twitter.

Interested in more info on the stocks mentioned in this story? Add Microsoft, NetSuite, salesforce.com, SuccessFactors or SAP to your watchlist.