Darren stumbled upon a very nice article from Rick Sherman on SeekingAlpha.com called On-Demand (or SaaS) Index: Fundamentals Matter. I have to say, from the first paragraph this article is enaging:

“The On-Demand Index [ODI] is down 18.55% YTD. This compares to YTD performance: iShares S&P GSTI Software Index Fund (IGV)  -7.69%, Dow -14.46%, Nasdaq Composite -12.69% and S&P 500 -12.94%. But the stocks in the ODI vary widely from a 24% YTD gain to a 69% loss. “

The article is a great read, the point it makes is timeless, and I agree with it 100%; and I hate when people don’t pay attention to this age-old adage. The adage being, the name or making something “cool” doesn’t matter; what matters is the whole package: products, revenue, earnings prospects, management team and competition. SaaS is something “cool”, but each SaaS company is different. Don’t invest in a SaaS company just because it’s SaaS. Check it out first, do your homework as Rick Sherman says. And to prove it: the on-demand index has gone down over the last year. Only 4 of 18 stocks on the On-demand index had a positive return last year (CRM, KNXA, TZIX, ULTI). And even the plus producers like CRM need to be researched. Critics say CRM is over-valued. As the article points out: the price-to-earnings ratio of CRM is 110 times the next year’s projected earnings. MSFT’s is 13. CRM is either “built for perfection or acquisition”.

Another reason why this article was great: there’s an On-demand index! Click on the image above to expand.