Why NetSuite Could Go Even Higher

Shares of NetSuite (NYSE: N  ) hit a 52-week high this week. Let's look at how it got here and see whether clear skies are ahead.

How it got here
NetSuite is a cloud enterprise software provider and has the backing of one the guys who knows enterprise software best: Oracle's (Nasdaq: ORCL  ) Larry Ellison. The company was started by former Oracle execs, and Ellison has a big personal stake.

The past few quarters have received mixed reactions. Fourth-quarter results marched ahead of analyst estimates, with CEO Zach Nelson noting that the company's cloud-based offerings continue to grow share at the expense of traditional providers. First-quarter figures, meanwhile, may have rattled investors with decelerating billings growth, overshadowing the results that again came in on top of expectations.

NetSuite still isn't profitable yet, but it continues to put up strong top-line growth, and the gross margin ticked up by 2% last year to 70%. Heavy spending on sales and marketing is what's holding back the bottom line, but operating cash flow nearly doubled.

Investors have mostly shaken off the deceleration concerns, and shares have now climbed to new heights.

How it stacks up
Let's see how NetSuite stacks up with other enterprise-software companies.

N Chart

N data by YCharts

And let's see how it compares on some fundamental metrics.

Company

P/S (TTM)

Sales Growth (MRQ)

Net Margin (TTM)

ROE (TTM)

NetSuite 14.3 29.7% (12.7%) (26.1%)
salesforce.com (NYSE: CRM  ) 7.5 37.9% (1.3%) (2.1%)
SAP (NYSE: SAP  ) 4 10.8 23.9% 30.1%
IBM (NYSE: IBM  ) 2.1 0.3% 15% 74%
Oracle 3.7 1.3% 26.9% 23.8%

Source: Reuters. TTM = trailing 12 months. MRQ = most recent quarter.

NetSuite is much smaller than these peers, and its growth prospects are fetching it a higher valuation. salesforce.com was also started by a former Oracle exec and similarly uses a cloud-based approach. Larger companies IBM and SAP are more mature and are solidly profitable.

What's next?
NetSuite's cloud-based approach appears set to continue disrupting the traditional enterprise-software scene. I think it will continue higher still, so I'm going to go ahead and also give it an outperform CAPScall today.

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Fool contributor Evan Niu holds no position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of IBM, Oracle, and salesforce.com. Motley Fool newsletter services have recommended buying shares of Netsuite and salesforce.com, creating a synthetic long position in IBM, and creating a bear put spread position in salesforce.com. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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  • Report this Comment On June 24, 2012, at 5:06 PM, neamakri wrote:

    very interesting. The Graham safety for (N) is -93.5% according to analysts estimates for this year. Currently, much worse.

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