• SAS (Private)
• Informatica (INFA)
• MicroStrategy (MSTR)
• Netezza (NZ)
• Teradata (TDC)

The PR machines from IBM (IBM) and Oracle (ORCL) have been each claiming to have the fastest database and hardware platform on the market today. Database vendors battling each other on who has the fastest or the most features is nothing new and has been going on for a couple of decades. But what has changed is “who cares?” Of course it does matter if you are a techie and you are evaluating which platform has those characteristics. It also matters to industry analyst and consultants that are evaluating and recommending the “best” database platform one can buy. But maybe the key criterion for future database market share growth is not the best but what is the “best buy.”

Some have speculated that they were waiting for the valuations of their acquisitions to bottom out before they pounced. If that was the primary factor, the buying binge would be in full swing since software valuations have rebounded significantly since the market lows.

Last week, Goldman Sachs analyst David Bailey raised his rating for the hardware sector to attractive from neutral. He remains cautious "although we are not calling for an immediate improvement in corporate IT spending" but he does expect "greater upside than downside to estimates into the seasonally stronger half of the year and in 2010." Next year he forecasts increased IT spending and corporate tech upgrades. With an eye towards the glass being half full rather than empty he states "This, combined with a 25% decline in the Goldman Sachs Technology Index since the peak in August 2008, creates a compelling buying opportunity".

Also last week, Goldman Sachs software analyst Sarah Friar ups her rating on the U.S. software industry to attractive from neutral. She feels that the worse of the IT spending cuts or restraints is over ; IT spending surveys indicate software is a priority; and, like the other analyst, that the second on half of this year and 2010 will be see increased IT spending. And specific to software she sees that software has lagged telecom and media performance year-to-date (YTD); software valuations are in-line with the average S&P valuations where they usually carry a premium; currency headwinds should abate or at least be less of a factor in year-over-year comparisons; and finally, M&A activity in software is heating up.

Our business intelligence (BI) and on-demand software stock indexes have been on a strong run this year. As discussed, this has accompanied an overall market bounce from March lows and support high tech in its current leadership role in year-to-date performance.

MarketWatch in its market snapshot Monday "Technology the brightest, most volatile star of stock market" commented on the tech sector. The article substantiated our earlier observations that tech is often an early stage leader but that the market, and tech, may have gotten ahead of itself. Caution in the near term is advised in this sector but long-term growth should be strong as we emerge from this recession.

The Business Intelligence (BI) and On-Demand Software indexes continue to outpace the broader market indexes with YTD returns of 27.8% and 35.3% respectively as of June 19. The attached chart (clink on to see a larger version) compares these indexes with broader market indexes along with a select set of high tech ETFs that have also outpaced.

BI & On-Demand Software Indexes versus Broader Market Indexes & High Tech ETFs (Click to enlarge)

The Dow Jones Index (DJIA) moved into positive territory for the year on Friday, June 12 with the S&P 500 at 4.79% year-to-date (YTD). Although much has been written about the broader indexes bouncing off their lows and the state of the various industries being bailed out, it has been the tech sector that has been one of the leading industry groups this year from a stock performance perspective. The NASDAQ 17.87% YTD gains leaves the broader indexes in the dust.

There are several reasons for technology sector’s performance. First, tech companies are generally in better financial shape than many other industries. Many tech companies, especially those in business intelligence and data warehousing, have little if any debt and are therefore not directly impacted by the credit crunch (of course their customers are so that impacts sales.) Software companies are often cash flow positive even in lean times with maintenance and service revenue offsetting slowing new license sales. The iShares S&P North American Technology-Software Index Fund (IGV), is up 24.3% YTD illustrating investors fail in software potential.

These indexes have been swept up in the general surge of high technology stocks with the NASDAQ up 11.2% YTD and software companies, as represented by the iShares S&P North American Technology-Software Index Fund (IGV), are up 16.3% YTD. However, both the business intelligence and on-demand software indexes have outpaced these high tech benchmarks.

In our industry (DW and BI) the core group of products has remained the leader for many years. The companies have changed because of acquisitions, but the underlying products listed stay the same. The top two data integration or ETL (extract, transform and load) products and top three BI (business intelligence) toolsets are perennial winners. And because the market is mature, at least there is a core set of functionality (but there is much innovation and expansion possible), and the leaders pack has been expanding in recent years.

On-Demand Index spiked even higher than the jubilant market yesterday gaining 8.43%. With yesterday’s gain the On-Demand Index moved into a positive territory for YTD (year-to-date) returns just as it did for two days last week. The index has matched the broader S&P Software Index with a 3.88% YTD.

First, in general, these companies are relatively debt free and generate a positive cash flow even in hard times. Second, although new contracts and upgrades may be delayed, many software firms have a steady stream of “maintenance” fees and professional services. Finally, you could consider these firms the “consumer staples” of the business world. Most of these firms sell software that businesses use to operate, improve productivity and manage/improve performance.

click to enlarge

The On-Demand or SaaS (software as a service) index started off the New Year with a gain of 3.9 percent. That is in relation to a gain of 3 percent for the S&P 500 and the iShares S&P GSTI Software Index Fund (IGV) daily gain of 4.2 percent on the first trading day (1/2/09) of 2009. That follows a gain for the last month of the On-Demand Index of 9.6 percent versus 5.7 percent S&P 500 and 8.5 percent for the IGV.

The recent gains are great news and may indicate a bottom has been established. It is still uncertain whether that bottom will be retested. Keep in mind that it will be difficult to fight the market if it continues to be a bear market that is just pausing or a recession if it is severe or stretches though 2009. It is likely that the software industry sub-sector and On-Demand Index will maintain some correlation, especially if the stock market or corporate IT spending stays in the doldrums just as they have over the last month.

Is Sun Microsystems (JAVA) slowly fading away?

Even though many of the companies within this index have been performing quite well from a business perspective this year, it is not surprising that these stocks have been hit harder than their software peers for several reasons: