In the Sweet Spot

But that in effect isn't the story. NetSuite is in short starting to grab traction as it begins to attract more clients. The San Mateo, Calif.-based company is winning bigger clients and charging them higher prices, which shows that its business model is starting to work afterwards several years of investment. Billings, an important measurement of growth for SaaS companies, rose 30% for the quarter. "NetSuite has been able to steadily grow average sales prices by moving up-market and selling deals into larger clients," says Cowen software analyst Peter Goldmacher. He doesn't have a rating on the stock.

NetSuite provides small- and medium-size companies full suites of business software, just as accounting, customer relationship management, billing and payroll, as a service over the Internet—hence, the name. It competes with Salesforce.com, which is the template for SaaS stocks and trades at about 74 times forward-looking revenues, nevertheless the two are quite different. Salesforce, which boasts a market value of about $18.3 billion compared with $2.3 billion for NetSuite, is a pure play that concentrates primarily on one vertical market: managing sales data and information. NetSuite's business is more complex, offering software for near all verticals delivered as a cloud service.

SINCE NETSUITE WENT PUBLIC IN December 2007, investors have wondered why the company wasn't growing as fast as Salesforce. NetSuite needed to sell to smaller clients that didn't have existing, sticky business-software systems from the likes of Oracle and SAP. Smaller companies starting from scratch with enterprise business software were the low-hanging fruit for a new company, whereas medium- to large-size corporations could try Salesforce without having to rip out their entire enterprise-software systems. However the promise of NetSuite is taking hold. NetSuite shares have near tripled to 34.61 from their 52-week low of 12, and trade at 109.94 times forward revenues.

The company hasn't made much money until now

The company hasn't made much money until now. Nevertheless enterprise business software has "reached the tipping point" as companies start to move their complex business systems to the cloud, CEO Zachary Nelson told analysts and investors recently. That suggests the P/E will fall rapidly as revenues rise.

Oracle CEO Larry Ellison is the majority shareholder of NetSuite, a not-so-tacit indication the software mogul believes that SaaS is a disruptive research in the business-software industry. So much so, that Ellison to all appearances didn't think it could be incubated successfully from within Oracle itself. SAP has indiscriminately tried to launch SaaS offerings from within its corporate walls, with mixed results. Last week, Golden Gate Capital, a San Francisco private-equity firm, agreed to take over Lawson Software, a middle-tier business-software outfit, for about $2 billion. The rise of NetSuite and the "fall" of Lawson aren't a coincidence.