On-Demand [or SaaS] Index: R&B Impacting Momentum

The R&B (Recession and Bear market) words are continuing to impact many of stocks on the On-Demand Index which is down 21.22%YTD and the individual stocks are down an average of 38.6% from their 52 week high. The Dow is down 6.91% YTD, Nasdaq Composite index is down 12.46% and the iShares S&P GSTI Software Index Fund (IGV) is down 11.28%.

Last week started with rumors of Oracle (ORCL) buying salesforce.com (CRM) with CRM and NetSuite (N) in sympathy, rising high on that day. That rumor did not become fact (for now) and does not seem based on financial and business criteria.

However, on Thursday NetSuite announced solid quarterly results but said that sales growth would slow in 2008 and that it would remain in the red for the year. NetSuite said part of the reason for slower sales growth would be that they do not have a large enough sales force, but that is the result of their business execution. Analysts debated whether the stock, despite a descent from its highs, was still too richly priced. Its stock went down 10.3% on Friday.

Remember in momentum investing: “The higher they rise, the farther they fall” if they meet some “bumps”. The catch phrase to keep in mind is “priced to perfection.” All of the companies in the On-Demand Index have gone public, have products useful to their customers and have enjoyed great growth rates. However, many of these firms are not making any profit and face considerable investments to scale to meet the growth rates reflected in their stock prices.

Some of these companies will prove to be very profitable in the long-run but others may not. Some of these companies with remain independent while others will be acquired. Some of their product offerings will be servicing their customers for years while other will fade away (like many of the Internet companies in the last boom.)

It will be interesting to watch this market initially explode, then expand and finally mature. Along the way, business execution, profitability and competition from the software titans will be key factors to a company and their products longevity.

fyi: The index is calculated on an equal-weight representation based on closing prices as of 12/31/07.

Disclosure: I have no current stock positions in any of the companies listed in this index and no current business partnerships