Introducing the On-Demand Software Stock Index

by: Rick Sherman

Nicholas Carr discusses the upcoming year for SaaS (software as a service) or On-Demand software in 2008: SaaS's breakout year? posted in his “Rough Type” blog on January 03, 2008. He refers to posts from Jeff Kaplan and Phil Wainewright who postulate 18 reasons why 2008 will be the year of SaaS.

All are strong reasons for the growth of On-Demand software and, as Nicholas points out, On-Demand vendors or the infrastructure vendors that they will use to host applications have invested in capacity for that growth.

Are we in a breakout year for On-Demand software? Will it rule the application space? Or will it meet the fate of many an internet and telecom vendor from the Internet boom and bust era (has it only been five or so years!)?

More likely the growth is there; it may be significant, but it probably isn’t as mind boggling as the zealots are proclaiming. And some vendors will flourish, some will fade away and others will be bought by the software titans.

The On-Demand (or SaaS) Stock Index

We will discuss On-Demand software and its impact on DW, BI and performance management solutions that people are implementing. One of the ways to view this market, but it is only one metric, is to watch the stock performance. I am introducing the On-Demand (or SaaS) stock index. This index will be initially be composed of the following dozen companies:

Company, Ticker
Athenahealth, Inc.(NASDAQ:ATHN)
Concur Technologies (NASDAQ:CNQR)
Constant Contact (NASDAQ:CTCT)
Kenexa Corporation (KNXA)
Netsuite Inc (NYSE:N)
Omniture, Inc.(OMTR)
Rightnow Technologies (NASDAQ:RNOW) (SLRY)
Salesforce.Com Inc (NYSE:CRM)
SuccessFactors (NYSE:SFSF)
Taleo Corporation (NASDAQ:TLEO)
Vocus, Inc. (NASDAQ:VOCS)

An index can be built using a weighted market cap or an equal weight formula. Using the weighted market cap method, the index is based on the amount of outstanding stock each company has, with large firms often dominating the movement of the index.

The equal weight approach allocates the same amount of hypothetical money invested in each company’s stock. This method provides a more representative sample of how the stocks are doing in aggregate. I have chosen to build the On-Demand Index using the equal weight approach.

On January 2nd I posted a reference to a cautionary stock recommendation regarding the SaaS stocks. The On-Demand Index has declined 8.8% since January 1st while the NASDAQ (QQQQ) has declined 5.3%. The first three trading days of this year have been a great illustration of momentum investing, i.e. sometimes all companies in an industry go up together and then they all go down together regardless of individual company performance.

Remember, stock performance, especially for new tech categories, is often overly optimistic and then gets overly pessimistic. We will watch the index to see where we are going in the long-run.