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Kenexa Is The Growth Bargain In The SaaS Index

|Includes: CRM, International Business Machines Corporation (IBM)
With Salesforce.com (NYSE:CRM) stock in nosebleed territory, SaaS fans may want to check out a high growth alternative that is also a bargain.

We track Q-Q Revenue Momentum as the primary driver in our SaaS Index Insights series.

We believe that we are in the “tornado” phase of the transition to SaaS. This is a reference to Geoffrey Moore’s series of books such as Crossing The Chasm. The tornado phase is when the market is growing fast. This is when winners emerge and create a lot of value.

In short, growth is all. Investors prize revenue momentum above all. Optimizing profits by keeping costs low is a lower priority. That can wait until markets have anointed a clear winner and growth starts to slow.


However, a lack of profitability and cash flow is a cause for concern. The SaaS model at scale (above $50m in annual revenues) should be highly profitable. If a company is losing money, that is major red flag. If a company has a profitability ratio that is significantly lower than the average that is a cause for concern. If the revenue momentum is strong enough, investors can look beyond what may be a short-term drag on profits due to an investment in growth.


In short, the primary factor we focus on is revenue momentum
. If we see that momentum we look at other factors. 
 

SaaS revenue can be compared across different companies because it is the same type of revenue. This is not true for most stocks. For example, you cannot meaningfully compare the revenue of a software company that sells perpetual licenses with a SaaS company. You certainly cannot meaningfully compare revenue between a hardware company and software company; let alone the revenue of a bank or oil company.

But $1 in monthly subscriptions in one SaaS company is almost completely the same as $1 in monthly subscriptions in another SaaS company.

If a SaaS company sells nothing and has no subscribers terminating, their revenue will be flat quarter-to-quarter. This is a LOT better than a traditional software company; if they sell nothing, their quarter will be horrible.

So, if a SaaS company has a quarter-to-quarter (“Q-Q”) revenue decline, we see a major red flag. That means they are suffering significant churn i.e. subscribers are terminating.

Even if the quarter is flat, we see major cause for concern. That indicates they are not selling enough to offset whatever churn they have. In some markets there are seasonal factors, but these are unusual in SaaS and we expect a strong management team to work around this.

So we look for Q-Q growth as the primary signal of company strength.

So here are the winners this quarter.

SaaS Stocks Ranked By Q-Q Revenue Growth

Here are all the SaaS Index stocks by Q-Q revenue growth:

Symbol

Last Qtr

This Qtr

Growth $

Growth %

KNXA

39.7

44.9

5.2

13.10%

LOGM

21.3

23.5

2.2

10.33%

TRAK

56.8

61.9

5.1

8.98%

CTCT

39.5

42.5

3

7.59%

N

43.9

47.1

3.2

7.29%

SPSC

10.2

10.9

0.7

6.86%

SFSF

43.8

46.8

3

6.85%

VOCS

22.3

23.8

1.5

6.73%

CRM

377

394

17

4.51%

RNOW

42.1

43.5

1.4

3.33%

CNQR

72.83

74.98

2.15

2.95%

TLEO

55

56.3

1.3

2.36%

ULTI

55.7

54.7

-1

-1.80%

DMAN

19.6

18

-1.6

-8.16%

Total

860.03

897.98

37.95

4.41%

 

In short KNXA looks like a winner. What really is surprising is when we rank the index by value, by PSR, KNXA comes out as a winner again.

This is only for patient investors. KNXA is a small cap stock and so may suffer from "small cap hell" ie being ignored by funds that only invest in bigger companies.

With Salesforce.com (CRM) in nosebleed territory, check out KNXA as another way to ride the SaaS Index wave.




Disclosure: none