Cloud Computing: Raining Down Profits

George is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Cloud-computing is a type of technology that has become increasingly prevalent in businesses everywhere. It allows businesses to use applications without actually installing them, which helps companies reduce operating costs.  Recently, a study sponsored by enterprise software giant SAP (NYSE: SAP) showed that cloud-computing could save U.S. businesses as much as $625 billion over five years. Moreover, this study also showed that existing cloud-computing companies such as Salesforce (NYSE: CRM), Fusion-IO (NYSE: FIO) and F5 Networks are projected to grow revenues by an average of $20 billion per year for the next five years. There are significant opportunities in the cloud-computing business, a business which is still relatively untapped, and one company is in a prime position to gain from these opportunities: NetSuite Inc.

NetSuite Inc. (NYSE: N) is a cloud computing company that targets small- and medium-sized companies. It has seen its stock increase 21.8% YTD and has been a hit among mutual funds: NetSuite has experienced 8 consecutive quarters of increasing mutual fund ownership and a 9% YOY increase in mutual fund ownership this first quarter of 2012. There are significant positives contributing to NetSuite's appeal as an investment, but there is also a large negative that can potentially affect NetSuite's future growth. 

Positives

NetSuite is the cloud computing industry's leading provider of  cloud-based financials and its ERP (enterprise resource planning) solution is the world's most deployed. NetSuite has already established its niche within the cloud computing industry, and it is also succeeding in gaining market share. NetSuite has been the leader in the professional services automation market for three consecutive years; according to SPI Research, NetSuite owns 20 percent of the professional services automation market. Moreover, NetSuite's products are also gaining traction outside of its target range of mid-sized companies as larger companies realize the potential of utilizing cloud computing. Large organizations such as Procter & Gamble, Land O'Lakes and the Girl Scouts of the USA have started to move their infrastructure to NetSuite.

NetSuite also has a very positive relationship with Oracle (NYSE: ORCL). This is in part due to the fact that Larry Ellison, co-founder of Oracle, was a major financier of NetSuite when it was starting up. Currently, Larry Ellison is the majority owner of NetSuite. NetSuite's relationship with Oracle has resulted in very little direct competition between the two in cloud-computing. Oracle is geared toward catering to extremely large organizations with its cloud software while NetSuite is geared toward the mid-market. As NetSuite CEO Zach Nelson notes, "In the mid-market, it is unusual for us to run into Oracle."

Netsuite recently unveiled its new product, one which could provide NetSuite with strong revenue growth in the near future. On Thursday, May 15, NetSuite introduced its SuiteCommerce platform, which enables businesses to manage their interactions with other businesses and directly with consumers via a cloud platform. This product is the central element to NetSuite's focus over the next decade: transforming how businesses operate with other businesses and with their customers. Moreover, Square, the mobile-payments company, has teamed up with NetSuite to integrate Square Register with SuiteCommerce to give merchants "complete cloud financial and CRM capabilities." This partnership, which will compete with e-commerce infrastructure offerings from companies such as Demandware, has great appeal to merchants and, if successful, will generate significant profit for NetSuite.

NetSuite's success in becoming one of the leaders of the cloud-computing industry is reflected in its financials. For the first quarter of 2012, sales rose 30% YOY, the best showing since 2008. In the same quarter, NetSuite also reported earnings growth of 100%; the average earnings growth of NetSuite's last 3 quarters is a solid 50%. Moreover, NetSuite has no debt and its healthy financial state will allow it to expand its operations and continue to dominate its market niche.

Negative

The cloud-computing industry is growing increasingly crowded as both new and old competitors seek a slice of the profits. According to study mentioned earlier, venture capital investments in cloud opportunities are projected to top $30 billion over the next five years. Although NetSuite's friendly relations with Cisco should keep Cisco from entering the mid-market, other established cloud and software giants, most notably SAP, have tried to penetrate the cloud market for small- to mid-sized companies. Although NetSuite has a huge market lead right now, the competitive saturation of the field could ultimately hurt NetSuite's bottom-line in the future.

The Verdict

Overall, NetSuite is one of the better companies currently dominating the cloud-computing market. With cloud-computing as an entire industry growing significantly and new products such as SuiteCommerce, NetSuite holds significant promise for investors.


Bilifuduo has no positions in the stocks mentioned above. The Motley Fool owns shares of Fusion-io and Oracle and has the following options: short JAN 2013 $150.00 calls on Salesforce.com and long JAN 2013 $150.00 puts on Salesforce.com. Motley Fool newsletter services recommend Netsuite and Salesforce.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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