On-Demand ready for a fall?

I am an avid reader of Barron’s “Plugged In” column written by Mark Veverka. In this week’s column “Will New Year Ring in Woes?” Mark solicits the software market predictions of Peter Goldmacher, a Cowen enterprise software analyst. Mark writes:

'Of the enterprise-software stocks in his universe, the "on-demand" group is probably the most vulnerable, especially smaller outfits with specialized products, Goldmacher says. The success of on-demand software leader Salesforce.comNetSuiteKenexa (KNXA), online expense- software maker Concur Technologies (CNQR), public-relations software developer Vocus (VOCS), and online business-optimization concern Omniture (CRM), and this month's sizzling public offering of (N), whose largest shareholder is Oracle CEO Larry Ellison, has put the group in the spotlight. But Goldmacher argues that many of these companies' offerings aren't essential and could be pushed out or slashed due to tight budgets. The group includes human-resource outfit (OMTR). Nice products, he says, but their stocks, buoyed by the sector's momentum, are richly trading at about 25 times 2008 earnings. Oracle, in comparison, commands about 17 times his 2008 estimate. Goldmacher predicts that mutual funds will sell baskets of these stocks at the first sign of weakness. "When things don't go well, it will not be an ordinary retreat," Goldmacher warns. "They will destroy these names."'

A survey earlier this year ranked On Demand or SaaS (software as a service) software as very likely to bet cut or postponed if corporate technology budgets are decreased. It is, as Goldmacher contends, a discretionary purchase, regardless of industry hype, that can indeed be postponed. The Internet boom and bust cycle should have taught us all that tech is NOT immune from economic cycles.

Let’s qualify this stock prediction by saying that stock performance, especially in the short-term, is not necessarily an indicator of long-term performance. There were many high flying stocks during 1999-2001 era for companies that no longer exist. On the other side, regardless of how well a particular company is doing, their stock will be dragged down if their overall industry is going down..

A couple of investing clichés come to mind regarding the On Demand software companies:
“a stock gets ahead of itself” and a stock is “priced to perfection.” A good company, especially a high tech company with great growth, often gets overbought, i.e. its stock price gets inflated.

This week’s “Plugged In” column gives us some cautionary advice: even if you think On Demand software and the companies that sell it have great long-term business potential, don’t just blindly invest regardless of the stock price.

The other investment cliché that come to mind if Goldmacher’s prediction comes true and these stocks drop is that maybe it is a "buying opportunity."

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