This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Why NetSuite No Longer Makes Sense For Investors

Stock quotes in this article: N, CRM, RHT, IBM, ORCL, MSFT, SAP

NEW YORK ( TheStreet) -- Banking on high growth while ignoring fundamentals is nothing new for investors in the tech sector.

This has been my main point of contention with stocks such as Salesforce.com (CRM) and Red Hat (RHT), which sport P/Es that often offend value investors. Nonetheless, those that are filled with illusions of grandeur care very little that the current fundamentals of these companies may not support the inflated valuations.

This is particularly true with stocks having anything to do with the "software as a service" (SaaS) space, or "the cloud." But I wonder, how can one sector fully support the growth expectations of its entire group?

Oracle (ORCL) and IBM (IBM) compete for the same set of customers, so a few companies will have to be left out. They can't all win.

This is where I've come to wonder whether NetSuite (N) still makes sense for investors. I don't think it does, for many reasons.

Aside from the competitive threats, NetSuite's stock has already appreciated by over 50% this year, rewarding investors handsomely with roughly $2 billion in premiums. But this is unlikely to continue.

What will also hurt NetSuite is its less-than-stellar fundamentals, which suggests there is a significant amount of speculation with its recent rise. Investors would be wise to secure profits now before the market wakes up to this mistake. What will follow will be the inevitable correction. Butthe stock is unlikely to recover.

The competitive threats and the recent unsupported run-up in the stock are bad enough, but the main concern here with NetSuite is that it is still unprofitable. If it has not been able to generate positive earnings with less competition over the past five years, there will be more uncertainty now.

But its valuation suggests investors are convinced that it will generate those positive earnings. The bulls argue that NetSuite's billings are growing and that it has had a couple of years of positive cash flow. But evidence suggests that it's unsustainable.

How much time are investors willing to give the company to prove that its model can be effective? One way to prove this is to turn a profit.

Although the company is doing a decent job growing its revenue now, at some point margins will start to matter. Otherwise, what is the point? It makes no sense for investors to continue to pay such high premiums on yields of only above-average revenue growth.

1 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 16,878.98 -163.92 -0.96%
S&P 500 1,958.86 -13.43 -0.68%
NASDAQ 4,449.3440 -44.0460 -0.98%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs