On-Demand (or SaaS) Index: Trade or Trend?

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On-Demand (or SaaS) Index: Trade or Trend?

This week the On-Demand or SaaS (software as a service) software index and the overall market have not reacted well to news of the stimulus and bailout packages. The on-demand software companies, though, closed out last week by outpacing a solid market with gains on Thursday (2/5/09) of 3.35% followed by Friday’s 4.29% advance. The macro environment continues to show worsening recessionary signs, but traders last week, in sort of a reverse logic, figured the dire news would hasten the passage of the stimulus package.

ODI 2008-02-11 

Certainly the macro environment, especially in the short-term, will impact market performance. Investors must assess how long the recession will last and how deep it will be, along with the impact of the stimulus package, further bailouts and whatever else world governments use to boast their economies.

Beyond the macro factors, an investor in tech stocks must assess how individual companies will weather the recession and be in great position for the eventual turnaround.  Many SaaS advocates argued last year that this technology was immune from a recession and a bear market, however, at least in terms of the bear market these stocks were hammered, losing over half their market value 2008. There are 2009 forecasts that are proclaiming that SaaS will be a winner in a recession and, in fact, benefit from it as companies drive to cut costs. 

When times are tough, both in terms of the stock market and IT budgets, only selective companies will perform well.  A good indicator of this is that about half of the stocks in this index are up YTD while the other half is down. As we have talked before the key to success will not just be in what technology is used, i.e. SaaS, but rather in what the applications are and who they are sold to, i.e. what industries.

Companies to watch

Two of the companies that appear to be posed to do well this year are Constant Contact (CTCT) and Blackboard (BBBB).  These companies’ stocks are up 10.6% and 18.8% YTD (year to date) respectively. Both of these companies offer applications that are attractive to an industry or market segment not in the main path of the financial tsunami. As an aside, I use both applications in different aspects of my professional activities.

Blackboard Inc. provides software applications and services in the education industry. Their clients include colleges, universities and schools (K-12) along with corporations, associations and government accounts. Although all these segments will feel the impact of recession, the type of products and services that Blackboard offer become “backbone” systems for teachers and students.  I find Blackboard indispensible when teaching data warehousing, business intelligence and data integration courses in a master’s degree program at an engineering university.

Although US K-12 schools are being hit by local/state funding and many universities’ endowments are down, Blackboard’s products are likely to be very attractive at all education levels. In addition, higher education enrollments and tuition continue to increase even in this recession.

Constant Contact offers on-demand e-mail marketing and online survey solutions for the SMB (small to medium business) market with over 250,000 customers. The products can be used for sales campaigns, marketing efforts, brand awareness and simply keeping in touch with customers and prospects. For a typical monthly bill of $35 what more effective method does a small business have to reach the market? Successful small business owners in a recession are likely to continue and expand these marketing efforts. And, in a recession, there is likely to be a surge of “accidental” independent consultants and people trying to build small businesses who were previously in larger corporations.

Last thoughts

Your overall assessment of the economy and its recovery will likely guide your investments and trades. For those investments, do your due diligence and select companies that will weather the recessional storm and are posed to growth substantially during the recovery. Corporations and consumers are likely to remain thrifty for quite a while after this recession, so on-demand software with its low TCO (total cost of ownership) will be attractive.



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