At first we took a beating after we published our initial report on NetSuite (pdf) on December 18 which suggested that a fair value for the stock might be closer to the *original* filing range of $12 instead of the revised one of $16 to $19.Â
All the institutional clients we talked to seemed to share most of our views and were staying away from the IPO.Â As the stock zoomed to $40 we felt a little out of step with the market.Â Â Â We know that the cash-flow aspects of a SaaS model are tantalizing but it doesn’t invalidate the importance of traditional business elements including features and functions, competition, market opportunity and so on.Â
In the last few days there have been a few more critical eyes cast in the direction of NetSuite stock.Â The Economist recently ran a story calling into question some of the market hype around the software as a service movement in general and the valuation of NetSuite in particular.Â Then this week a traditional Wall Street firm, Citibank, initiated their own coverage of the stock with a sell rating.Â Their price target is still a fairly charitable $28/share.
We have the deepest possible conviction on the extremely high value of software in general and are fond of elements of the SaaS model from both a functional and a financial perspective.Â But that doesn’t mean that SaaS is the only story to be paying attention to.Â From an architectural perspective we see more opportunity in the form of more hybrid approaches that leverage cloud computing and the SaaS model but may contain large elements of traditional software delivery and licensing methods.Â Just because the old implementation of perpetual software licensing was sometimes problematic doesn’t mean that perpetual licenses don’t make sense.Â
Software companies are getting smarter at delivering software that works well out of the box and integrates well with other applications and information sources.Â Many applications are perfectly suited to an online subscription model, others are not.Â
We continue to feel that NetSuite as a stock investment only looks attractive at much lower levels.
— Kris Tuttle
[Disclosure: Research 2.0 has not as yet held a short position in NetSuite as of January 16, 2008.]