Software Maker Hits Rough Spot After Hot IPO

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It looks like one of L.A.’s newest stocks is a sensitive one.

Software provider Cornerstone OnDemand Inc. recently reported revenue growth of more than 60 percent for the first quarter this year. But the company’s shares have taken a tumble anyway.

Why? Investor fear of slow economic growth, said Scott Berg, a research analyst with Feltl and Co. in Minneapolis.

Santa Monica’s Cornerstone sells human resources software that includes programs for employee recruitment, training, compensation and evaluation. When the economy is healthy and companies are hiring, they’re more likely to buy Cornerstone’s software, but when job growth is stagnant, software sales could be, too.

“There’s fear that growth is slowing in the United States,” Berg said. “As it slows, the thought is that corporate investments like buying software might slow.”

Cornerstone stock, which trades on the Nasdaq under the symbol CSOD, closed May 18 at $19.67, down 13.5 percent from $22.74 the previous week.

The stock slide had little to do with the company’s recent earnings, Berg said. Cornerstone reported May 12 that first quarter revenue was $15.7 million, up 63 percent from $9.67 million in the same period last year. The company isn’t profitable, however, reporting a net loss of $47.6 million compared with a loss of $3.8 million in the first quarter last year.

Cornerstone attributes the wider net loss to a $42.6 million charge for the change in fair value of preferred stock warrants. The company also increased spending on development of new technology and additional employees.

Berg, who has a “buy” rating on the stock, said he’s not concerned about the loss numbers.

“The company is in an early growth mode still, so the fact that net income continued to be negative is not a concern,” he said. “I was more impressed with the strong revenue numbers.”

Customers pay a multiyear subscription fee for access to Cornerstone’s software, typically for three years. The company’s revenue got a boost from the addition of 85 customers in the last year, including Univision Communications Inc. and MetroPCS Communications Inc.

Cornerstone began publicly trading March 17, raising more than $136 million in what was then the strongest Nasdaq initial public offering of the year.

The company’s stock was boosted by investor interest in its software-as-a-service technology, which allows companies to give employees easier access to software than in the past because it’s accessible on the Internet instead of as a download to a specific computer.

Berg believes that investors are still bullish on software-as-a-service and that Cornerstone’s stock prices will bounce back. But he said that stocks for companies with significant growth are more likely to fluctuate with the market.

“Hypergrowth stocks can frequently be all over the place,” he said.