Morgan Stanley's NetSuite Analyst Has Egg On His Face; Upgrades And Bumps PT By 182%

It is to be noted that the takeout price of $109 implies 11.2x EV/NTM recurring revenue and 9.4x EV/CY17 recurring revenue, both of which are at or above Oracle's traditional takeout multiples of 5x–9x.

"[I]t is hard for us to fully justify the fundamental basis for this deal, considering extensive product overlap between Oracle's Fusion ERP and the core NetSuite, Oracle management's continued rhetoric of the success of their own ERP products, as well as a large valuation premium that is being paid for NetSuite assets with slowing organic growth," analyst Stan Zlotsky wrote in a note.

Related Link: Goldman Plays Catch Up: Upgrades Netsuite To Neutral, Removes From Sell List

The analyst noted that NetSuite's organic growth slowed to 22 percent in most recent second quarter versus 33 percent in the same quarter last year.

However, from a financial engineering standpoint, Zlotsky said NetSuite could add about $1.3 billion of revenue for Oracle in their FY18.

"With ~80 percent of that NetSuite revenue highly recurring subscriptions, we see $0.03 of EPS accretion from the deal," Zlotsky highlighted.

Given the high premium paid, the analyst sees limited probability of competing bids and doesn't expects any regulatory concerns.

Zlotsky also raised the price target to $109 from $60.

Shares of NetSuite surged 18.39 percent on Thursday to close the day's trading at $108.41, while shares of Oracle closed at $41.19.