Bull versus Bear on N
We've all seen 'toons where a character, torn between two points of view, sprouts a miniature devil on one shoulder and a miniature angel on the other as she dithers betwixt them. Well, that's me with any investment, except I get a growling bear and a snorting bull.
Bull: This company enters an underserved market with a suite of applications and makes them available as a hosted service. This saves customers the complexity and cost of installing and upgrading the applications, maintaining computer hardware, keeping reliable backups, etc. The right offering at the right time.
Bear: The market for small and mid-sized business applications is hardly bereft of competition. Besides the two big ERP vendors, there's Intuit, SalesForce.com, and even the open-source Compiere. I could go on and on.
Bull: The big ERP vendors' offerings have struggled to get traction with the service model. It's true that SalesForce has CRM, and it's no accident that many companies vying to get into this space are leading with CRM - you don't need to spend a decade coding a bunch of unsexy functionality required by back-office applications. It took vision and some pretty deep pockets to build what this company has. Yes, both Intuit and Compiere have made similar investments in these unsexy but necessary bits. But Intuit historically has relied on the packaged software model. Likewise, I'm not aware of Compiere offering a hosted solution. A cost advantage for companies such as SalesForce and NetSuite is that they don't have to spend money on packaging and installation, testing their software on multiple hardware and OS platforms, etc.
Bear: Maybe so, but you must be barking mad to pay 12x sales (at the IPO price) for a company that's still losing money. Don't you know that small-cap growth stocks are the worst-performing equity asset class? Everyone's looking for the next Microsoft, and they rarely find what they're looking for.
Bull: Point taken - the share price could certainly fall in half or worse. The losses are narrowing, and the business model delivers recurring revenues on any new sales, so they appear to stand a decent chance of eventually turning a profit. They got a lot of cash from the IPO - enough to support many quarters of the current burn rate. This isn't some web-based pet food store.
Bear: Um, hello! The global economy appears to be headed towards commodity-driven inflation and a recessionary credit implosion. Stagflation won't be much fun, especially for the small and mid-sized businesses you're hoping will be the source of NetSuite's revenues. Don't take my word for it, check the performance of that Russell 2000 index fund I told you to dump last year.
Bull: True - I'm betting that the service model for software will be cheaper than bespoke systems and the traditional packaged software model. Companies trying to save money may have even more reason to look at NetSuite. Now, where did I put my flares and mood rings anyway?
Bear: Don't be silly, you couldn't squeeze into those old flares if you starved yourself for a month. Won't the big players respond and try to squash NetSuite? For example, isn't this space strategic for Microsoft?
Bull: Mmmmm, well most of those big players are potential acquirers or merger partners as well, eh? I'll admit Microsoft is an unlikely suitor - NetSuite runs on the Oracle database and the Java middleware stack.
Bear: Let's agree to disagree and see how your investment's faring a year from now. Meanwhile, you might want to start dieting again, in case you can't afford new flares.
Bull: Sure - after the holidays, OK? |
