The top BI pure-play vendors – Business Objects (BOBJ), Cognos (COGN) and Hyperion Solutions (HYSL) – all experienced pronounced declines in their stocks prices this summer.

My blog post Business Objects: Ouch! preceded the 52 week low price point for shares of BOBJ and COGN, as well as the overall software index represented by the iShares IGV ETF. Since that time these stocks have rallied significantly with two out of three creating new 52-week highs in the last four weeks.

The following chart illustrates the three BI pure play stocks, the IGV ETF and the NASDAQ for the year-to-date (YTD).

In addition to the chart above, the following table lists these stocks in relation to their 52 week high and low:

What does the decline and rise mean in relation to the BI market and the individual BI companies?  Will this impact software market consolidation?

Why did these stocks drop in the first place over the summer? The stock decline is based on a few factors.

First, many people became cautious of the overall stock market, and in particular high tech during the summer. Concerns over oil prices, housing market, capital spending, the Iraq war and the US mid-term elections put a damper on the rising stock market.

Second, expectations regarding the BI market from a software licensing perspective became more realistic in my opinion. BI growth is solid and continues to be so BUT the growth rates, especially in terms of software licenses, is generally slowing down. A company’s price-to-earnings (P/E) ratio is a reflection of people’s expectation for growth and some people felt that they had grown too high for the BI pure-plays.

It’s a classic example of how as a company and market get larger in term of sales the high growth rates become more subdued. As that happens a company’s P/E gets lower and often its stock price goes lower to reflect the slower growth. As the company’s sales and earnings rise then the stock price rises again.

Finally, each of the BI pure-plays are going through a product upgrade cycle that, as we have discussed earlier, is going slower than they and their investors would like. The slower software upgrade cycle  is not a reflection of software quality or functionality but rather a more prudent approach by customers in their approach to spending their IT budget and resources.

Why the significant rise?

First, sometimes all boats rise together (in this case high tech, software and other industries) and that is a partial expectation. The economy does not appear to be collapsing for now (although Wal-Mart sales drove the overall market and BI stocks down yesterday!) and expectations are that business capital spending will continue at it’s projected single digital increases for this year and 2007. That’s not a boom but it certainly is not a bust (if the forecasts are correct.)

Second, BI and performance management (PM) projects appear to be at the top of IT priorities for this and next year. And I would suggest this number may be understated since many business initiatives that have BI/PM components as necessary ingredients are not being counted in the BI category.

An important qualifier is that regardless of how high a priority a BI project is, if the economy slips into recession then these projects can be postponed just like any other IT projects.

Finally, the latest quarterly reports and financial analysts’ health checks of the BI pure-plays are positive resulting these firms reaching new 52-week highs.

Has anything changed in the BI market since the summer? Not really. The demand for BI across industry segments and company sizes remain strong. The demand is based on business, competitive and regulatory pressures rather than being technology-driven.  Many data warehouse and BI projects in the past were built in the "If we built it, they will come" principle but that is generally not the case now.

Finally, a little crystal ball predictions on mergers and acquisitions: Although the best time. i.e. cheapest time, to buy the BI pure-plays from a stock price perspective was clearly during the summer, their market caps are still within the price range of the large software or high tech companies, as well as by private equity firms. All the top BI pure-plays are attractive acquisitions in terms of sales, profits, growth rates, customers, technology and people. Oracle, Microsoft, IBM and SAP are all possible buyers.  And lately I have been thinking that HP should also consider acquiring BI and data warehouse companies. I have NOT heard any rumors regarding HP, this is just a idea that I believe would be a strategic move for HP.