On-Demand Index: Online and Up-to-Date

by: Rick Sherman

The On-Demand Index [ODI] is now available online and up-to-date (with a potential delay of 20 minutes for stock quotes.) I am using Google Docs and Google Finance to present the index. This is appropriate, if we are tracking on-demand or SaaS (software as a service) stocks we should use an on-demand software product to present the index.

The index is included in this post but is also available on the Data Doghouse sidebar by clinking on "The On-Demand (or SaaS) Index" graphic.

As of Thursday's market close, the On-Demand Index has fallen back into bear market category with a loss of -21.5% YTD (year-to-date.) That compares to losses YTD for the major indexes (Dow, Nasdaq and S&P 500) of between -14.2 to -15.8%. But the numbers look worse when compared to the iShares S&P North American Technology-Software Index Fund ETF (NYSEARCA:IGV) with a -8.7% loss YTD.

There were a few blog posts over the course of the last month proclaiming that the On-Demand stocks were about to take off because a few of those stocks had been rising during July. I thought that call was a little premature - bear market rally? - but bit my tongue (or held my keyboard) because it is really tough to call tops or bottoms. However, the ODI has gone back into bear territory following the broader market down.

Although many of the ODI companies have continued to experience solid sales grow through the first half of the year the market has punished most of these companies. Only two of these companies, Concur Technologies (NASDAQ:CNQR) and Kenexa Corporation (KNXA) have positive YTD stock gains while the others have YTD stock losses. Five stocks have had YTD losses of over 40%.

There are several reasons for the ODI moving back into bear territory:

  • The current U.S. (and maybe the world's) economic slump appears to be impacting corporate spending. This has resulting in recent downgrades to several ODI stocks.
  • The profitability (or lack thereof) is starting to wear thin on investors. Seven of the ODI companies still lose money and several have very low gross margin especially in comparison to other software firms. The argument by many technology folks is that SaaS is the future of the industry and a game changer. Those beliefs may be true but only when SaaS can turn a healthy profit.
  • Momentum works both ways. The bull market pulls everyone up and the bear everyone down. There are exceptions but in general it is tough to beat the momentum especially when, as we have discussed before, a stock is priced to perfection. Notice that seven of the stocks have no P/E (they are losing money) and five have P/Es over 100 (perfection territory.) Maybe a company can grow enough to justify these lofty evaluations but the market is concerned at the moment.

Keep in mind: don't get caught up in the hype. Great concepts do not always yield great products, great companies do not always sell great products and great companies are not always great investments.

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