Is SaaS Worth the Hype?

The next time somebody tells you software as a service (SaaS) is a home-run opportunity, consider this: SaaS stocks are down roughly 12 percent this year, according to MSPmentor's SaaS 20 Stock Index.

Even worse, at least four SaaS companies in the index have seen their shares slide more than 30 percent this year.

Yes, SaaS is the wave of the future. I believe SaaS will increasingly meld with open source and managed services to create big opportunities for investors, customers and IT service providers.

But for every winner like Salesforce.com (CRM), there are numerous losers and hard-luck stories. Salary.com (SLRY), NetSuite (N), Taleo (TLEO), and Omniture (OMTR) have all declined sharply since the New Year.

There’s no single explanation for the declines. Perhaps SaaS stocks were overvalued heading into 2008. And maybe we’ll see a rally as enterprise and midsize firms cut internal IT spending amid the economic slowdown, and more fully embrace SaaS.

Either way, I’m a long-term believer in the SaaS market. But be sure to ignore the hype: The rising SaaS tide won't lift all boats. Some software companies will out execute their rivals.

The high-tech industry has a winner-take-all mindset, where shares in market leaders (Cisco (CSCO), Google (GOOG), etc.) earn lofty price premiums over the also-rans. The same will happen in the SaaS space, where fast-growing companies like Saleseforce.com overshadow dozens of small firms that will fail.

Disclosure: I hold a few shares in Salesforce.com, but do not own shares in any other SaaS 20 Stock Index members

Comments

[Flash Gordon]

Technology is not exempt from the laws of economics. Something can be a very good idea, but if other people can copy the idea and offer a competing service, margins drop. SaaS is a good idea but there are no barriers to entry to offering competing products. I view very few things in technology as monopolies. Microsoft is a monopoly in my opinion (the competition for the o.s. (vista) and office is weak, and now they are extending their client advantage into the enterprise, (unix servers now have products with windows authentication)) and they have a p to e of 16, about the average for the s&p. crm can have competition and they have a p to e of 200 for projected 2008 earnings. if SaaS companies went down this year it just means that equity pricing for those companies got ahead of itself due to overzelous mutual fund managers and momo investors. imho

[p. smith]

it's about time to dump CRM stock and double short that pig...why? when you see pumpers talking about all these kind of nonsense...