Get to Know a Growth Stock: NetSuite

When it comes to investing, the most important truth is that you'll make mistakes. Big mistakes, little mistakes, even catastrophic mistakes will plague us all.

Growth investors accept this truth because, as students of history, they know that one big winner can erase a lifetime of investing mistakes. You can be wrong 60% of the time and still crush the market.

Get to know a grower
What cheapskates and traders will tell you -- rightly -- is that sustainable growth isn't easy to find. But "not easy" isn't the same as "impossible." In this column, we'll borrow from the market-beating methods found in David Gardner's Motley Fool Rule Breakers service and the collective Foolishness of our 115,000-strong Motley Fool CAPS community.

We're looking for:

  1. Existing growth. Winners tend to keep on winning. At Rule Breakers, we seek to invest in firms that have demonstrated high growth.
  2. Excellent margins. Pricing power is an indicator of sustainable advantage. We want to be early investors in sustainable growth stories.
  3. A reasonable price. The PEG ratio isn't perfect. But, on balance, it's a good idea to buy high growers at a discount to their projected growth rate.
  4. A big problem, solved. We're like venture capitalists in that we believe that massive economic value is unleashed when firms elegantly address big, expensive problems. Admittedly, this is a subjective criterion. But a history of outsized returns by expert VCs such as Sequoia Capital, Kleiner Perkins Caulfield & Byers, and Benchmark Capital suggest it's also a necessary one.

Meet NetSuite
First up for our four-filter test is NetSuite (NYSE: N  ) , an on-demand software provider that competes with salesforce.com (NYSE: CRM  ) and which beat Oracle (Nasdaq: ORCL  ) in creating software for Apple's (Nasdaq: AAPL  ) iPhone. Last week, it announced support for the new Chrome browser. Now, let's have a look at the numbers.

The stats:

Metric

NetSuite

Trailing 12-month rev growth

50.2%

Projected 5-year earnings growth

24.4%

PEG ratio

Not avail.

Gross margin

69.5%

Sources: Capital IQ, a division of Standard & Poor's, and Yahoo! Finance.

The competition:

Company

Market Cap

RightNow Technologies (Nasdaq: RNOW  )

$438.6 mil

NetSuite

$964.4 mil

Salesforce.com

$6,810 mil

SAP (NYSE: SAP  )

$62,280 mil

Microsoft (Nasdaq: MSFT  )

$214,660 mil

Sources: Capital IQ, a division of Standard & Poor's, and Yahoo! Finance.

The CAPS:

Metric

NetSuite

RightNow

salesforce.com

CAPS stars (5 max)

**

**

*

Total ratings

150

70

877

Bullish ratings

115

59

422

Percent Bulls

76.7%

84.3%

48.1%

Bearish ratings

35

11

455

Percent Bears

23.3%

15.7%

51.9%

Bullish pitches

17

13

59

Bearish pitches

9

2

99

Sources: CAPS, as of September 10, 2008.

Bull or bear?
Good revenue growth and high projected earnings growth, check. The PEG ratio, however, is nowhere to be found. For the size of the problem and the attendant opportunity, let's turn to commentary from the CAPS community, beginning with the bull case.

"Like Oracle, I can vouch for the technical viability of this NetSuites products. It's very difficult for mid to large size companies to run custom software that can handle their entire business," wrote CAPS All-Star jkipling in January. "NetSuite is in a good position to solve this real world problem for a lot of mid to large sized companies. SAP is also a competitor, I like them too, but NetSuite is more sexy right now."

"Baby of Larry Ellison. Partnered with ADP to sell directly to their clients. Great business to offer an affordable product to small and mid-market companies who can't afford the likes of major ERP and integrated client management systems," wrote top stock picker Shupe47 in March.

And the bears? "I have used Netsuite's CRM system. It's not the most impressive. Their infrastructure and network bandwidth were also not optimum. The CRM market is quite crowded now. Hence, it's going to be disappointment in the long term," according to zcap, another CAPS All-Star whose take appeared in January.

Zaegs, who first gave NetSuite the thumbs-down in December, adds, "I've seen this software in action and it is just ok. It does have a lot of promise and it's fairly impressive what they've been able to do, but like most new software companies, they still have a ton of hurdles to clear."

Sex versus substance, in other words.

I, too, like cloud computing as a platform for business software but salesforce.com has been the dominant performer in this market. Can NetSuite differentiate itself well enough to produce the returns investors expect? Add your voice to the debate by signing up for CAPS today. It's 100% free to participate.

Get your clicks with related CAPS Foolishness:

To find other problem-solving growing companies, check out Rule Breakers with a 30-day trial on us.

Fool contributor Tim Beyers, who is ranked 18,668 out of more than 115,000 participants in CAPS, also writes for Motley Fool Rule Breakers. Here's how to try this market-beating service free for 30 days. Get access to all of Tim's Foolish writings here.

Apple is a Stock Advisor selection. Microsoft is an Inside Value pick. Tim owned shares of Oracle at the time of publication. The Motley Fool has a disclosure policy.


Read/Post Comments (1) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 11, 2008, at 6:30 PM, risrach wrote:

    This article speaks about NetSuite as if it the same as Salesforce.com. Aside from the fact they are both SaaS applications, they have very little in common. Salesforce.com is a very good CRM solution (aka. Siebel). NetSuite is more akin to SAP's approach but focused on delivering a product for the needs of the growing and mid-sized business, offering one complete solution for your entire business including Accounting / ERP, inventory, Ecommerce, and CRM. They have a completely different approach from salesforce.com and a very differentiated solution.

    Rob

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