Software as a Service Stocks: Down 50% In 2008

When it comes to software as a service’s potential, is the glass half full or half empty? Before you answer consider that MSPmentor’s SaaS 20 Stock Index is now down 50.42 percent from January through Nov. 14, 2008.

Even worse: The poster child for SaaS — Salesforce.com (CRM) — has seen its shares fall nearly 60 percent this year. Plus, five companies in our index have seen their shares plummet more than 70 percent this year. And investment firm Global Equities Research predicts SaaS and open source companies will suffer greatly amid the current economic turmoil.

Why are some people so down on SaaS? And why do I remain upbeat about the long-term promise of SaaS? Here are four quick observations.

1. Right Market, Wrong Time: Consider the situation at NetSuite (SaaS accounting software). The company’s most recent quarterly revenues grew 44 percent. Impressive, but profits didn’t meet Wall Street’s expectations and NetSuite shares are down nearly 80 percent this year. Part of NetSuite’s problem is timing. The company launched its IPO in December 2007, a few months before Wall Street headed into its downward spiral.

2. Sometimes, Hype Hurts: Many SaaS stocks are down sharply this year because their performance got ahead of earnings. Look at the five-year chart on Salesforce.com and you’ll see a mostly upward trajectory. The situation started to change dramatically in August 2008 — when Wall Street stumbled and investors wondered if Salesforce.com needed a correction. Well, that painful correction has arrived. (Full disclosure: I owned a few Salesforce.com shares in 2007 and early 2008 but sold this past fall.)

3. Sometimes, It Pays to Be Private: You know about publicly held SaaS companies. But keep a close eye on the private ones as well. SugarCRM, the fast-growing open source CRM provider, says SaaS represents more than 30 percent of its new sales. And managed services software providers like Autotask, ConnectWise, N-able , Level Platforms and Zenith Infotech have largely built their businesses around SaaS. (Watch for Kaseya to shift aggressively in that direction soon.)

4. It’s Still Early: Despite all the hype, we’re still very early in the shift to SaaS. Watch for established enterprise companies like CA Inc. (formerly Computer Associates) to launch some SaaS solutions in the days ahead. And you likely know about the SaaS efforts at Microsoft, Symantec and so on.

It’s a turbulent time for technology companies. Despite all the hype, SaaS companies are not immune to that economic turbulence. And I expect on-premise software to stick around for decades.

But the continued, gradual shift to SaaS is undeniable. The predictable costs, easy upgrades and reliable service are impossible to ignore.

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