THE RATINGS GAME: NetSuite Gets Mixed Reviews From Analysts
SAN FRANCISCO (Dow Jones) — About a month after NetSuite Inc.’s successful public debut, analysts remain upbeat about the software firm’s long-term prospects, but are divided on its near-term direction.
NetSuite (N) shares were down about 1.5% early Tuesday afternoon at $28, up 8% from its initial offering price of $26.
Analyst Patrick Walravens of JMP Securities initiated coverage on the company this week with a market-outperform rating, although he said that “the current consensus estimates for NetSuite may be too high, in our opinion.”
He pointed out that NetSuite, which offers business-software applications as a Web-based service, is “the clear leader in this space.” But he added: ” Expectations have run high, and the company has not yet given official guidance.”
Walravens commented that NetSuite is “relatively expensive” and that most of its customers are small and midsize businesses and divisions of large corporations, “making it more expensive to reach, acquire and retain customers.”
The analyst also said that Oracle Corp. (ORCL) Chief Executive Larry Ellison is a major owner of the company, “which may lead to conflicts of interest.”
Robert Stimson of WR Hambrecht, which was one of the underwriters of the NetSuite IPO, did not issue a rating on the stock, although he said that the company “is not a cheap stock at these levels, and investors must keep in mind that NetSuite is in the early stages of its product life cycle and the true growth and market opportunity/potential is difficult to gauge at this time.”
NetSuite is one of the leading companies in a relatively new business model, also referred to as software as a service or utility computing, in which clients pay only for the computing power and storage they use.
Instead of setting up their own data centers, companies pay a fee to use a vendor’s network through the Web to perform a range of tasks such as keeping track of customer sales and managing payroll. In effect, customers buy computing power the way they pay for other services such as water and electricity.
In an interview, Stimson stressed that he still thinks NetSuite remains “a great story.” But he noted certain investment risks.
“We believe that NetSuite has considerable lead over its competitors with its on-demand technology,” he wrote in a research note. “However, the longer-term ramifications of large competitors increasing their developmental efforts in this area remain unknown.”
NetSuite’s competitors include Salesforce.com Inc. (CRM), which offers mainly software applications for running customer relations, and the traditional software behemoths Oracle and SAP AG (SAP).
Analyst Jason Maynard of Credit Suisse, which also underwrote the NetSuite stock offering, initiated his coverage of the company with an outperform rating. “We believe NetSuite will continue to show revenue growth that outpaces the overall market, while delivering ongoing operating margin and cash-flow improvement.”
He cited three “megatrends” that could benefit NetSuite, including the shift to on-demand computing, the adoption of integrated software products and the applications needs of small and midsize businesses.
Analyst Michael Huang of ThinkEquity Partners began his coverage of NetSuite with an accumulate rating, saying that the company has “established credibility across multiple platforms” with its broad portfolio of applications.
Still, he commented: “We are not convinced that NetSuite is completely insulated from a less-certain economy. We acknowledge that some organizations are likely to shift to software as a service to permanently revamp cost structures, but are also concerned that noncritical tech upgrades could see some delays.”