Sector Overview: SaaS

by: Sramana Mitra

The SaaS sector has been relatively unaffected by the weak economy. Since the SaaS business model helps cut costs, business has been good, with most companies beating estimates quarter after quarter. However, the stock prices have taken a beating in the later half of the year. This presents a great opportunity for the stronger players to consolidate and investors looking for a bargain to buy. Let’s take a look at which companies should best be able to withstand the recession. (NYSE: CRM), the leader in the SaaS sector, is at the top of my Top Eight SaaS Stocks list. With more than $800 million in cash, it is a hot favorite for playing the role of consolidator. Salesforce recently initiated revenue guidance between $1.35 and $1.36 billion for FY2010. But even though the company has turned in a strong performance quarter after quarter, its stock has fallen about 50% over the year and is trading around $30 with market cap of about $4 billion. Analysts anticipate a slowdown; I anticipate an acquisition spree in 2009.

Chart for (<a href='' title=', Inc.'>CRM</a>)

Concur (NASDAQ:CNQR), the expense management software maker, is another company that is booking profits in the recession as companies look to control costs. Concur helps companies enforce travel policies and control costs through its systems. As per the results of a recent survey by Reardon Commerce, a competitor, 68% of travel managers say the top priority for businesses is travel policy compliance to bring down costs. Concur is trading around $30 compared with about $35 earlier in the year, a fall of just 14%. Its market cap is about $1.5 billion and 2008 revenue was $215.5 million.

Chart for Concur Technologies, Inc. (<a href='' title='Concur Technologies, Inc.'>CNQR</a>)

Omniture (OMTR) is another company that is strong enough to consolidate its space. Earlier in the year, it acquired Visual Sciences and has recently acquired the search and merchandizing assets of Mercado. The stock has lost about 70% of its value and is currently trading around $10, with market cap of about $730 million. The company’s not strong enough currency-wise to play the consolidator role, but it may recover in 2009.

Chart for Omniture Inc. (<a href='' title='OMNITURE, INC.'>OMTR</a>)

Taleo (NASDAQ:TLEO), the talent management leader with 2007 annual revenue of $128 million and Q3 2008 revenue of $46.8 million, also joined the ranks of consolidator with its acquisition of Vurv in July. However, its stock has fallen about 80% this year to currently trade around $7. My interview with CEO Michael Gregoire can be found here.

Chart for Taleo Corp. (<a href='' title='Taleo Corporation'>TLEO</a>)

Its rival SuccessFactors (NYSE:SFSF), which has a strong CEO is on my list of Long-Term Hold Stocks as well as the Top Eight SaaS stocks. SuccessFactors went public in November 2007 and was trading around $9. It is currently trading around $8 with a market cap of about $460 million after a strong third quarter.

Chart for SuccessFactors, Inc. (<a href='' title='SuccessFactors, Inc.'>SFSF</a>)

Also on my Top Eight SaaS Stocks list is RightNow (NASDAQ:RNOW), which is also on the path to profitability. Earlier in the year, it made its shift from the licensed software business model to SaaS. Its stock is currently trading around $7, a fall of about 50% over the year. Its market cap is about $250 million. That seems very cheap.

Chart for Rightnow Technologies Inc. (<a href='' title='RightNow Technologies, Inc.'>RNOW</a>)

Citrix (NASDAQ:CTXS) is another company on my Top Eight Stocks list. It has a SaaS portfolio but is not a pureplay SaaS company. Time and time again, I have concluded that this company could be a good acquisition target for big companies like SAP (NYSE:SAP), Oracle (NASDAQ:ORCL) and even IBM (NYSE:IBM). It is currently trading around $23 with a market cap of about $4 billion.

Chart for Citrix Systems, Inc. (<a href='' title='Citrix Systems, Inc.'>CTXS</a>)

The last stock we will discuss is NetSuite (NYSE:N). After going public in December 2007 at $26, it is currently trading around $8, and has a market cap of about $480 million. It acquired OpenAir in June this year. Recent earnings coverage is available here. I am less bullish about this one as the competition in the SaaS ERP space is steep.

Chart for NetSuite, Inc. (<a href='' title='NetSuite Inc.'>N</a>)

Disclosure: None