Some pundits said software as a service (SaaS) was a recession-proof industry. Boy were those experts wrong, according to the MSPmentor's SaaS 20 Stock Index.
Like the broader Dow Jones Industrial Average, the SaaS 20 Stock Index is now in bear market territory, down 19.63 percent so far in 2008.
So, what's ailing SaaS companies? Some of the problems are tied to 2007 hype vs. 2008 market realities. Concur Technologies (NASDAQ:CNQR), for instance, hit an eight-year high in December, notes TheStreet.com, amid all the SaaS hype.
But now, investment firms like Piper Jaffray are downgrading Concur shares because of economic weakness. Piper Jaffray's downgrade of Concur, which occurred July 2, noted that Concur enjoys "routinely strong earnings performance."
Translation: Some SaaS companies continue to enjoy strong business models, but not even the on-demand software industry can fully escape from the economic slowdown.
Will the SaaS industry implode? I don't think so. Rather, I think SaaS represents a critical land grab right now, especially as IT consultants sort out new opportunities to host applications like Microsoft Exchange, SharePoint and Dynamics.
Still, there will be plenty of turbulence ahead. NetSuite (NYSE:N), for one, went from Wall Street darling to dud in a matter of weeks -- as this stock chart shows. And Salesforce.com (NYSE:CRM) is the only SaaS 20 Stock Index member to see its shares rise more than 5 percent this year.
SaaS certainly won't lift all boats. But I think survivors in the SaaS market will perform far better than traditional software companies.
Disclosure: I own a handful of Salesforce.com shares, but don't own shares in any other SaaS 20 Stock Index companies.