Don't Let Groupon Distract You From This Cloud-Computing Winner

Most investors paying attention to Web stocks today are paying attention to Groupon (Nasdaq: GRPN  ) . I suppose that's understandable. Thanks to sharply restricted supply -- IPO engineering, I call it -- the stock is up more than 44% from its opening price of $20 a share.

All of which is keeping headline watchers from paying closer attention to NetSuite (NYSE: N  ) , which beat estimates and raised its full-year revenue outlook in reporting third-quarter financial results. The stock is up more than 6% as of this writing.

We've seen this before from NetSuite. This time, adjusted earnings came in at $0.05 a share, a penny better than estimates and last year's performance. Revenue improved 23% to $61 million, also ahead of projections, while cash from operations grew 79% year over year for the nine-month period ended in September. Management also raised its 2011 revenue outlook to $235.2 million to $235.7 million, $1 million better than last quarter's guidance and above Wall Street's average projection, according to data compiled by Yahoo! Finance.

The implication? More customers are signing contracts that require up-front cash payments, a commitment that should frighten competitors such as SAP (NYSE: SAP  ) and delight Oracle (Nasdaq: ORCL  ) chief Larry Ellison, who owns a majority of NetSuite's outstanding shares.

Clearer skies for cloud computing
As I see it, NetSuite is supplying half the software needed to successfully manage a business, with an emphasis on manufacturing, inventory, product design, accounting, and other back-end functions not seen by customers.

salesforce.com (NYSE: CRM  ) has made an excellent living supplying the other half -- the customer-facing half -- that includes marketing, support, sales, and the like. Other investors will argue that neither NetSuite nor salesforce.com serve human resources needs addressed by the likes of Taleo (Nasdaq: TLEO  ) and SuccessFactors (Nasdaq: SFSF  ) .

Fair enough. What matters is that businesses are taking to cloud-computing alternatives at a high rate. Or at least high enough that NetSuite is able to put up numbers attractive to the Big Money investors who used to ignore this stock. No longer.

Do you agree? Disagree? Please weigh in using the comments box below. You can also keep tabs on the cloud-computing movement by adding these stocks to your Foolish watchlist:

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Google+ or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader.

The Motley Fool owns shares of Oracle. Motley Fool newsletter services have recommended buying shares of salesforce.com. Motley Fool newsletter services have recommended shorting salesforce.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (1)

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  • Report this Comment On November 04, 2011, at 3:23 PM, ERPVet wrote:

    I feel the need to correct you. "More customers are signing contracts that require up-front cash payments" is not an accurate statement. SaaS offerings are pay-as-you-go with the payments being incurred as Operating Expenses and not Capital expenses. Traditional ERP s/w that companies license perpetually require the cash outlay upfront (unless they finance the purchase).

    The drive to SaaS is theoretically about a lower total cost of ownership by NOT making the large cash/capital outlay up front and using the software as the vendor has intended and designed it (these both enable and constrain what a company can do) to reduce the ongoing operating costs (OpEx) for using and maintaing the software. In other words - less complexity in the business process = lower cost to run the s/w that supports your business.

  • Report this Comment On November 04, 2011, at 6:03 PM, Mega wrote:

    The focus on "cash from operations" instead of free cash flow and "adjusted earnings" instead of earnings only serves to obscure the company's value. Of course, even using their own questionable metrics they are absurdly overpriced. Their only hope is getting bought out by Oracle.

  • Report this Comment On November 06, 2011, at 7:41 PM, SCfromHELL wrote:

    I fear ERPVet needs to update his understanding of what SaaS truly is. Perhaps the Vet part puts him/her in an older technology era and not yet up to date with Software as a Service. SaaS is not a billing option. While it is technically a subscription service offering, the billing method has really nothing to do with it. Newer players like Workday are true SaaS and a month to month type arrangement is not an option. Clients are signing with up fron cash payments (and their inherent discount advantages) yet in their financials, this is a subscription. SaaS also isnt always about a lower cost of ownership. Its as often a decision for continuous innovation, regular updates to the software, and SOA, Web services, state of the art technology. My 2 cents

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