Top 8 SaaS Stocks

We’ve been looking at SaaS closely for a while now. Let’s do a recap of the "Top 8 SaaS Stocks" that I am tracking. I also want to reiterate that I believe SaaS stocks are recession-proof.

Salesforce.com

The leader in on-demand customer relationship management, Salesforce.com (CRM) is one of my "Top 8 SaaS Stocks." The company just announced excellent Q2 2008 results which beat analysts’ expectations. One of its most ambitious efforts is to use an incubator and a platform strategy to spawn a large number of SaaS startups on its platform. Read my interview series with former general manager and SVP René Bonvanie on this effort. I am very bullish on this strategy. Salesforce.com will be the first SaaS company to cross a billion dollars in annual revenue. The stock is expensive, so look out for buying opportunities due to macro issues or short-term misses. The fundamentals are excellent on this company.

Concur

Concur (CNQR) has been chosen because, like several of its counterparts, it has delivered strong earnings for the past year. I just covered the company's earnings in a post last Thrusday. The company recently signed a partnership agreement with American Express (AXP) in which Concur will promote the American Express corporate card exclusively and in turn American Express will promote Concur’s expense management software. The deal with American Express and the company’s excellent earnings have sent the stock soaring approximately 20%. I interviewed the company’s CEO, Steve Singh, last year. Again, the stock is expensive, and you need to wait for a buying opportunity.

Taleo

Taleo (TLEO) closed at $21.60 Thursday up from $18.74 pre-earnings. This leader in talent management had a record quarter with revenue growth from the U.S. as well as international markets. The company signed a deal to acquire Vurv, which further strengthened its market position. Earnings coverage can be found here and an interview series with CEO Michael Gregoire can be found here.

A strong management team, flawless execution, and healthy sector growth are all good indicators for a long-term 'hold.'

RightNow

RightNow (RNOW) also declared Q2 2008 earnings that were above expectations. The stock closed at $16.54 on Thursday, up over $2.00 from its pre-earnings price. Earnings coverage can be found here. This past week’s Entrepreneur Case Studies series, which features RightNow founder and CEO Greg Gianforte, can be found here.
I love the company’s Montana roots - an enviable cost structure position leveraging a stable workforce.

Omniture

Omniture, (OMTR) unlike the other SaaS companies, reported disappointing earnings, which the company largely attributed to acquisition-related costs. A more detailed report on its earnings can be found here. Despite its recent performance, the company is still one of my Top Picks because its core value proposition is still sound. It’s also a company that has shown signs of wanting to do a roll-up in the web analytics space, which is something that I like.

Citrix

My discussion of Citrix’s Q2 earnings (CTXS) can be found here. The stock had declined about 14% in the last six months, rising only after the earnings release, making it a good SaaS buy. As I mentioned earlier in the week, I still think it is a good target for acquisition by SAP (SAP) or even Oracle (ORCL) or IBM (IBM). This is not a pure play SaaS stock, but rather a portfolio of good growth businesses, including virtualization.

SuccessFactors

On-demand performance and talent management solutions company SuccessFactors (SFSF) last month crossed four million users worldwide. The company also reported record second quarter results of revenue growth of 71% y-o-y. This one has been featured on my Seven Stocks For Long-Term Hold.

Salary.com

Salary.com (SLRY), makers of on-demand data services that allow customers to compare salaries, reported its first quarter fiscal 2009 results on July 31 and the stock spiked almost 25% to $5.13 overnight. It has come down slightly now and closed at $4.30 on Friday. You can read my interview with on-demand pioneer and Salary.com CEO Kent Plunkett here. My guess is, either Taleo or SuccessFactors will look to acquire this one in the next 18 months, and if that happens, a 40-50% premium is in order.

Disclosure: None

Comments

[Ranjit Nayak:]

At the risk of being an iconoclast, I feel some other companies need to be listed in the SaaS group. Why should'nt Google or eBay belong to this group. After all they provide services like search and auction on the internet?

I do agree that this group can weather a recession better than other software companies.

2008 Aug 12 09:37 PM

[MiamiWebDes...:]

Is Salesforce.com the new ADP ... or the next Datapoint?
What will happen if blue sky clears the cloud?

***

This headline recently appeared in several places across the Web:

"Salesforce.com Passes $1 Billion Annual Revenue Mark"

THIS IS NOT TRUE. I don't know whether this material misstatement arose from media manipulation or an honest mistake, but it's genesis is most likely this 20 August 2008 press release...

"Salesforce.com Announces Record Fiscal Second Quarter Results"
tinyurl.com/5m5mea

...the subheading of which claims:

"First Ever Software as a Service Company to Exceed $1 Billion Annual Revenue Run Rate"

THIS IS NOT TRUE, EITHER. "Software as a Service" is marketing technospin for "service bureau". And payroll processing giant ADP--another service bureau--exceeded not only a "run rate" but actual annual revenues of $1 billion in 1985:

"The original outsourcer, Automatic Data Processing..."
tinyurl.com/56y5tx

Yes, SalesForce.com did report revenues of $263 million for their most recent quarter. And yes, they have raised "FY09 Revenue Guidance to $1.070 - $1.075 Billion". But NO, Salesforce.com has NOT passed the "$1 Billion Annual Revenue Mark". And despite Cheerleader/CEO Marc Benioff's effusive exuberance, some like Tiernan Ray do not share his enthusiasm:

"Salesforce's Deferred Revenue Debacle"
tinyurl.com/6oagtp

Perhaps in an effort to meet ever-inflating investor expectations--a fire they themselves have fueled--Mr. Ray notes that Wedbush Morgan analyst Michael Nemeroff "...thinks Salesforce may be pushing customers to sign more multi-year subscription contracts by lower prices, which could be hitting deferred revenue." And reading that, for me, brought on a disturbing case of Datapoint deja vu:

tinyurl.com/gk77r

"By the early 1980s, Datapoint was a Fortune 500 company. Under immense pressure to increase sales figures, its sales representatives encouraged customers to place large orders at the end of the fiscal year, permitting the company to count the orders as revenue even though the money had not been received and, in some instances, the sold equipment had not yet even been produced.... When some of the customers went broke before paying their bills, Datapoint had to reverse sales or record substantial bad debts, which caused the company to lose $800 million of its market capitalization in a matter of a few months in early 1982. The U.S. Securities and Exchange Commission (SEC) ordered Datapoint to stop this practice."

Is Salesforce.com the new ADP ... or the next Datapoint? Some say their business model is to take your watch and then bill you for the time. If so, what will happen to all those watches if blue sky clears the cloud?

Bruce Arnold, Web Design Miami Florida
www.PervasivePersuasio...

2008 Aug 24 10:57 AM