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On-Demand Index spiked even higher than the jubilant market yesterday gaining 8.43%. With yesterday’s gain the On-Demand Index moved into a positive territory for YTD (year-to-date) returns just as it did for two days last week. The index has matched the broader S&P Software Index with a 3.88% YTD.

ODI 2008-03-23

From an IT market perspective, on-demand software or software-as-a-service (SaaS) offers compelling TCO (total cost of ownership) characteristics versus traditional (on-premise) software which is why most IT research analyst firms estimate this type of software will fare well during recessionary and cost-cutting times. That’s the glass-is-half-full argument. But the other side, i.e. the glass-is-half-empty, is that the new business model does not offer the high return (cash flow and profits) of the traditional software vendors.

Add in many of these firms being relatively new, half not making a profit, some still needing availability to credit markets, still high expectations (high P/Es) despite stock prices being hit hard last year and a recessionary constrained IT spending environment.

There is a lot of great software by companies in this index that offer terrific value to their customers. Yet these stocks continue to be momentum plays in this type of stock market regardless of fundamentals. These firms may be tempting acquisitions if the price is right but since many of these firms’ software are industry specific, they may be attractive to non-traditional IT players as acquirers if M&A activity occurs.

The following chart lists the ranked YTD perfromance by company:

ODI 2008-03-23 Rankings

Source: On-Demand Software Up, Short-Term Issues Remain