NetSuite Could be a good Buy

In my post Trend Radar 2008: SaaS in SME, I said that in 2008, SaaS will penetrate the SME market in a big way and that NetSuite (NYSE: N) will be one of the beneficiaries of this trend. It provides enterprise resource planning (ERP), customer relationship management (CRM) and e-commerce applications for mid-size businesses.

NetSuite went public on December 20 with an opening price of $26 and within two days, its price shot up by 77% to $45.98. Oracle CEO Larry Ellison is a major shareholder. Since then, its stock has tumbled down to around $32 and market cap is around $1.9 billion. Compare it with Salesforce.com which is trading around $55 with market cap around $6.4 billion, latest quarterly revenue of $193 million and net quarterly income of $6.5 million. NetSuite seems overpriced. But let’s take a closer look at the company and its valuation.

My posts on the company before it went public are here and here. NetSuite, Inc. was founded in 1998. In 2006, its revenue was $67 million and net loss was $35.7 million. For the nine months ended September 30, 2007, its revenue was $76.8 million and net loss was $20.6 million. For the latest quarter, net loss was less than $2 million for the quarter, compared to almost $10 million in the previous quarter.

NetSuite aims to position itself as a provider of a comprehensive range of integrated business applications for Small-Medium Enterprises (SME). It therefore competes against niche players like Intuit (Small Business Accounting and Payroll), and also Microsoft and SAP. The fact that it targets two hot trends, SaaS and SME, makes it a company worth watching in 2008.

The fact remains that SME is a large, under penetrated opportunity, and the likelihood of Netsuite (and some other SaaS vendors) penetrating this market is quite high over the next 5 years. There is enough unserviced market for multiple players to flourish. Given the market opportunity, NetSuite’s focused execution, narrowing losses, and backing from Larry Ellison, I think this is a very interesting company, and potentially a good stock to buy as the market gyrates and beats good companies down.

Note: We had some anomaly in Netsuite’s valuation numbers based on Yahoo! Finance data in the Intuit post earlier. The numbers in this post seem more correct.