Sector Overview: SaaS

The SaaS sector has been relatively unaffected by the weak economy. Since the SaaS business model helps cut costs, business has been good, with most companies beating estimates quarter after quarter. However, the stock prices have taken a beating in the later half of the year. This presents a great opportunity for the stronger players to consolidate and investors looking for a bargain to buy. Let’s take a look at which companies should best be able to withstand the recession.

Salesforce.com (NYSE: CRM), the leader in the SaaS sector, is at the top of my Top 8 SaaS Stocks list. With more than $800 million in cash, it is a hot favorite for playing the role of consolidator. Salesforce recently initiated revenue guidance between $1.35 and $1.36 billion for FY2010. But even though the company has turned in a strong performance quarter after quarter, its stock has fallen about 50% over the year and is trading around $30 with market cap of about $4 billion. Analysts anticipate a slowdown; I anticipate an acquisition spree in 2009.

Concur, the expense management software maker, is another company that is booking profits in the recession as companies look to control costs. Concur helps companies enforce travel policies and control costs through its systems. As per the results of a recent survey by Reardon Commerce, a competitor, 68% of travel managers say the top priority for businesses is travel policy compliance to bring down costs. Concur is trading around $30 compared with about $35 earlier in the year, a fall of just 14%. Market cap is about $1.5 billion and 2008 revenue was $215.5 million.

Omniture is another company that is strong enough to consolidate its space. Earlier in the year, it acquired Visual Sciences and has recently acquired the search and merchandizing assets of Mercado. The stock has lost about 70% of its value and is currently trading around $10 with market cap of about $730 million. The company’s not strong enough currency-wise to play the consolidator role, but it may recover in 2009.

Taleo, the talent management leader with 2007 annual revenue of $128 million and Q3 2008 revenue of $46.8 million, also joined the ranks of consolidator with its acquisition of Vurv in July. However, its stock has fallen about 80% this year to currently trade around $7. My interview with CEO Michael Gregoire can be found here.

Its rival SuccessFactors, which has a strong CEO is on my list of Long-Term Hold Stocks as well as the Top 8 SaaS stocks. SuccessFactors went public in November 2007 and was trading around $9. It is currently trading around $8 with a market cap of about $460 million after a strong third quarter.

Also on my Top 8 SaaS Stocks list is RightNow, which is also on the path to profitability. Earlier in the year, it made its shift from the licensed software business model to SaaS. Its stock is currently trading around $7, a fall of about 50% over the year and market cap is about $250 million. That seems very cheap.

Citrix is another company on my Top 8 Stocks list. It has a SaaS portfolio but is not a pureplay SaaS company. I have time and again concluded that this company could be a good acquisition target for big companies like SAP, Oracle and even IBM. It is currently trading around $23 with a market cap of about $4 billion.

Last, we discuss NetSuite. After going public in December 2007 at $26, it is currently trading around $8 with a market cap of about $480 million. It acquired OpenAir in June this year. Recent earnings coverage is available here. I am less bullish about this one as the competition in the SaaS ERP space is steep.

This segment is a part in the series : Sector Overview