Netsuite's Price Too High For Modest Expectations

In the sky-high market of young company valuations, holding your head above water is just not good enough.

Shares of corporate software maker Netsuite (N), a recently public firm backed by Larry Ellison, chairman and chief executive of Oracle (ORCL), fell as much as 11% today after the company last night beat estimates for its fourth quarter but projected sales and profit for the current quarter that were more or less just in line with estimates.

That’s just not enough for some people. Citigroup analyst Brent Thill, who initiated with a Sell rating a month ago, reiterated that rating in a note today, writing that Netsuite’s valuation is just too rich. “At 8.0 time next twelve month enterprise value to sales, Netsuite has the highest multiple in on-demand,” writes Thill, referring to the market for software served up from a Web site. “The stock would be more attractive in the high $ teens.” Specifically, there are cheaper plays in the group, such as Salesforce.com (CRM), which sports a 6.5 times EV/sales multiple, according to Thill, or Concur Technologies (CNQR), which has a 7 times multiple, according to Thill’s estimates.

On the other hand, W.R. Hambrecht & Co. analyst Robert Stimson, who has no rating on the stock, nevertheless has some positive things to say Friday. He thinks Netsuite’s premium valuation may be merited given that it has 40% projected sales growth compared to an average 28% relative to the rest of the group. By his estimate, Netsuite appears even pricier, at 9.3 times this year’s projected sales, but “we believe that the current valuation has become more reasonable and is starting to look more interesting to investors,” writes Stimson.

At some point, he thinks, the stock will be judged not based on sales but based on free cash flow, though it’s a bit early for that, admits Stimson: right now, Netsuite trades at an horrendous 83 times projected free cash flow in 2009!. Sheesh!

Netsuite, which came public in December, had initially taken off like a rocket, but it has since fallen about 45% amidst the tech malaise. Friday, the shares are down 9.45% at $21.27.