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Software-as-a-Service stocks in long-term uptrend

The most famous of the SaaS stocks is Salesforce.com (CRM) and certainly its CEO Marc Benioff has been outspoken and flamboyant in his announcements that SaaS is the next big thing and his company is in the vanguard of the movement.

In many ways, SaaS is the next big thing and the large-cap software companies like SAP and Microsoft are making attempts to play in this sector.

What many investors may not have noticed is that there is a group of smaller companies that, as start-ups, committed to SaaS as a primary vision and have been quietly reaping the rewards ever since.

These firms include: Taleo (TLEO), Concur Technologies (CNQR), Ultimate Software (ULTI) and Omniture (OMTR). These four stocks have more than doubled since September 2005. They are all small caps trading on the NASDAQ. Three have rather similar charts with Omniture setting itself apart from the others by tripling over the time frame. Let's take a closer look at each one.

Four SaaS stocks

Taleo

The focus of Taleo is human relations, specifically screening, selecting, hiring, developing and assessing employees. They have solutions for enterprise customers and small and midsize businesses, for salaried workers and hourly workers. So far in 2007, Taleo has gained four analyst buy recommendations and one neutral rating despite not being profitable. This stock is all about growth and they have been signing up large and small customers at a rapid pace. The company has invested heavily to create an end-to-end solution set and to ensure its infrastructure can support the million or so users that hit its site each day. Profitability is expected to be right around the corner. Current price: $24.73

Concur Technologies

Concur's area of expertise is travel and expense management. Included is the ability to pay vendors, to reimburse employees, to set and enforce expense policies, book travel and organize complex corporate meetings. Concur recently announced that it is selling more shares and that it is raising revenue guidance for the 4th quarter of 2007 and the 1st quarter of 2008. CNQR already sports a billion dollar market cap, it is solidly profitable and has been growing steadily, mostly by double digits. With all the expectations for continued growth, there is no surprise it has a pretty high PE. Current price: $29.54

Ultimate Software

Ultimate Software, sharing some similarities with Taleo, is also focused on human resources and talent management solutions but, in addition, provides payroll functions. In terms of stock performance, ULTI has been the conservative one, having gained just less than 50% so far in 2007. Not as glamorous as the others, the company is nevertheless profitable and growing at double digit rate. Current price: $32.82

Omniture

Omniture, with a particular focus on e-commerce, provides online business optimization services that enable customers to manage and enhance online, offline, and multi-channel business initiatives. Included are such things as web analytics, data warehouse functions, campaign analysis, search engine marketing and customer segmentation and analysis facilities. This stock has been on a tear though it recently received an analyst downgrade. It has the largest market cap of the four and is adding customers rapidly. Its revenue growth rate is in the high double digits but, like Taleo, it is currently unprofitable. Current price: $28.05

A competitor to Omniture is Visual Sciences (VSCN). This company, though smaller than OMTR, is growing revenues at a double digit rate and, though still unprofitable, has at least achieved positive cash flow. Based on its current chart, it might be the better buy. Current price: $14.78

Conclusion

It is clear the SaaS sector has yielded some high performing stocks and growing ranks of customers. It has attracted lots of buzz and the interest of the large-cap tech companies. There is a stock for every style of investing. Solid growth and profitability, acceptance by large corporate customers -- choose Concur. Good revenue growth, growing customer base, acceptance by large and small customers -- choose Taleo. High momentum stock price, high rate of revenue growth, adding customers left and right, higher level of risk -- choose Omniture. Despite the high stock prices and elevated PEs, SaaS is a sector that is just beginning to mature and we will see some companies that will achieve critical mass, some that will be bought out and some that will fall by the wayside. The ones discussed in this post have made a very good start on the road to success.

Disclosure: author currently owns none of the stocks mentioned in this article

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