Can NetSuite Inc. (N) Continue To Rise?

NetSuite Inc. (NYSE:N) is a provider of cloud-based enterprise resource planning systems (ERP). It also offers customer relationship management (CRM) systems and e-commerce systems. Market has clearly favored the stock this year. NetSuite Inc. (NYSE:N) is up 33% year-to-date. Yet, the company is trading at an astronomical 196 forward P/E. Can this be sustained?

With the invention of the cloud, ERP and CRM systems have started a second life. Established companies began to race to take their solutions to the cloud, while newbies started to fight for their piece of the pie. At the current moment, the market seems to be more concerned about growth, rather than about earnings. salesforce.com,com, inc. (NYSE:CRM), a company that provides CRM products, trades at 66 forward P/E. More established companies, like SAP AG (ADR) (NYSE:SAP) and Oracle Corporation (NASDAQ:ORCL), trade at more usual valuations. SAP AG (ADR) (NYSE:SAP) trades at 19 forward P/E, while Oracle Corporation (NASDAQ:ORCL) trades at 12 forward P/E.

The loss and the profit

NetSuite Inc. (NYSE:N) has ended its first quarter with a GAAP loss of $0.18 per share and non-GAAP net income of $0.04 per share. The difference between GAAP and non-GAAP results is mainly because stock-based compensation is not included in non-GAAP results. I’ve found exactly the same thing when I was looking at salesforce.com,com, inc. (NYSE:CRM). Let us turn to the report to find out what the company has to say about it:

“We believe that the exclusion of stock-based compensation expense allows for financial results that are more indicative of our operational performance and provide for a useful comparison of our operating results to prior periods and to our peer companies because stock-based compensation expense varies from period to period and company to company due to such things as differing valuation methodologies and changes in stock price.”

Very lengthy sentence, isn’t it? There are chances that you’ve skipped it, so I’ll point out one word – “expense.” NetSuite Inc. (NYSE:N) says stock-based compensation is an expense, but rules allow us not to count it on non-GAAP basis, so we are happy to present positive figures to you. I would have been comfortable if GAAP and non-GAAP results were both profitable. But, they are a loss and a profit, and this alarms me. All in all, GAAP is more conservative, and some healthy dose of conservatism is needed when you see sky-high valuations.