Sometimes, a stock suddenly gathers momentum and appreciates rapidly. This has been the case with Demandware Inc (NYSE:DWRE), which has gained 58% since the beginning of June and is up 70% this year. The e-commerce company has enjoyed a ride after SAP AG (ADR) (NYSE:SAP) announced its plans to acquire hybris, one of the leaders in the e-commerce field. Can the stock continue its momentum?
Current state of things
Demandware Inc (NYSE:DWRE) is a fast growing company. It expects to deliver 35% total revenue growth in the second quarter. We would know if those plans turned into reality in August. As of now, the company has a $1.4 billion capitalization. The company is estimated to show revenue of roughly $100 million at the end of the current year. So, Demandware is trading at 14 times its projected sales.
As is it usual for young software companies, Demandware Inc (NYSE:DWRE) posts loss after loss. The company is projected to post losses in current year and in the next year, although the losses next year are expected to be smaller. The company had $107 million in cash and short-term investments at the end of the first quarter. Operating loss was just over $7 million, so Demandware has plenty of time to become profitable before it eats through its cash reserves.
However, the shares would probably not be running so fast if it was just for future profits. Current environment in the cloud technology field means possible acquisitions. Giants are rushing to acquire small companies for hefty checks.
Let us turn to the comparison with the SAP-hybris deal. The deal is estimated between $1 billion and $1.5 billion. Hybris had roughly $100 million in sales in 2012, however, this figure must be significantly bigger in 2013 because of growth. If we estimate a conservative 40% growth before the SAP AG (ADR) (NYSE:SAP) deal, this would bring us to a $140 million revenue estimate. SAP AG (ADR) (NYSE:SAP) has paid between 7 and 11 times sales for hybris. Another important fact: hybris was said to be profitable in 2012.
Demandware Inc (NYSE:DWRE) is already worth $1.4 billion according to the market. An acquisition almost always comes at a premium. But, the company already costs more than hybris in terms of price-to-sales. In addition to that, it is not profitable. Would someone be so impatient to drive prices even higher and buy Demandware?
Now, SAP is a big competitor for Demandware Inc (NYSE:DWRE). In addition to SAP, another fast rising stock, NetSuite Inc (NYSE:N), is providing its e-commerce solutions. NetSuite Inc (NYSE:N) has enjoyed a 46% rise this year despite the fact that its forward P/E has grown to an astronomical 224. With a capitalization that is over $7 billion, NetSuite Inc (NYSE:N) could be a takeover target for the biggest of the biggest.
As Larry Ellison has a big stake in the company, Oracle comes to mind, but such a deal would not be met positively by Oracle’s shareholders for sure. The conflict of interests is just too obvious. NetSuite has grown way past the mean analyst target price, which stands at $82.75 and implies a 19% downside. In terms of price-to-sales, NetSuite is even pricier than Demandware Inc (NYSE:DWRE), trading at 18 times projected sales.