Netsuite IPO: I don’t get it.

Ok, i’m the first to acknowledge that when it comes to the share market, I’m not an expert. But even I can see that something doesn’t add up on the NetSuite IPO.

Problem number 1. The company hasn’t turned a profit in 9 years of operation. If it isn’t making a profit, how then will it fund its product development, support and sales and marketing costs let alone repay the debt it now has to it’s shareholders?

Problem number 2. The segment it’s targeted at is highly competitive and given that the offering is essentially the same (except for the delivery method) Netsuite doesn’t have a bunch of differentiation. Ben Kepes discussed this some time ago.

Problem number 3. economics. Recent commentary would indicate that the US is heading into a recession. Bob at Smoothspan writes a great piece on the effects of a recession. And while the annuity revenue of SaaS affords NetSuite with some protection, Bob’s number 1 rule of flight to quality doesn’t. That would go to MS, SAP, Oracle and possibly Intuit.

Problem number 4. SaaS revenue takes time to grow. My experience with SaaS is that you cannot spike your revenue. Even signing up large customers you are still subject to the rule of 78. So for an unprofitable enterprise who obviously hasn’t got the scale advantages to yet cover its costs (and is still subject to marginal cost per user increases unlike companies that sell CD’s) it would seem to be a long haul to profit and hence dividends. The numbers just don’t stack to me.

Problem number 5. Hype. If you are in during the early days of hype good on you. Unfortunately its quite damaging for others who are in it later or for the long term. The Successfactors IPO combined with this one have set a trend. I’m old enough to remember the heady days of 1998-2001, I remember 2002 very well too. I wonder how many investors have long memories too.

I’m not bagging Netsuite, i’ve never seen their product or had any dealing with them at all. What i am questioning here is the apparent valuation the market has given them and wondering about the soundness of that valuation.  I guess only time will tell….



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