Tech stocks for tough times

(Fortune Magazine) -- Whether it's a slowdown or full-blown recession, most people agree we're heading into choppy economic waters. The question, then, is which sectors and which companies are best positioned to withstand the tempest? One answer is technology, especially companies that help their customers stretch a buck -including firms that run a software-as-a-service model and ones that are pushing the limits of computer-virtualization technologies.

Companies in these categories offer customers the ability to do more with less, whether it's money, people or both. And there is good reason to take a look at these tech companies no matter what the prevailing economic winds, because they are riding trends that will barrel ahead in good times and bad. A warning: These are hot tech stocks, not value plays. To dabble in these names, you have to swallow high price/earnings ratios and the risk that one less-than-torrid quarter can crater the shares.

Salesforce.com (CRM) CEO Marc Benioff has been among the most vocal proponents of the idea that customers should rent, rather than buy, software. The idea has caught on, and Salesforce.com's stock has soared to the point where it's just too expensive to recommend right now. Instead, consider another software-as-service company, Concur Technologies (CNQR). With its Web-based package that automates the filing and payment of travel and business expenses, Concur saves companies money by getting rid of manual reports and ensuring that employees hew more closely to company policies.

After absorbing its chief competitor, Gelco, through the acquisition of H-G Holdings in a $160 million cash deal in October, Concur looks as if it has a lock on the burgeoning online T&E market. At $35, with an estimated 2008 P/E of about 60, it's not cheap. But analysts peg revenue growth at north of 25 percent annually for the next five years, and the company is leading the pack in a market- outsourced travel and entertainment accounting - that analysts estimate could grow to $7 billion in five years.

Taleo (TLEO) offers Web-based "talent management" software that simplifies hiring and performance reviews. The software does two things that make bean counters smile: cuts human resources' costs and helps identify the employees who are most essential. (SuccessFactors also competes in this space, but unlike that company, Taleo is profitable.)

Yankee Group expects the talent-management-software market to grow from about $3 billion in 2007 to nearly $4 billion in 2008. William McNee, CEO of research firm Saugatuck Technology, says he expects Taleo to start working with other companies to sell its service in bundles - a move that could yield great results. "I think that would be a very interesting play for 2008," he says.

There is no doubt doctors could use a little Web-based boost to their notoriously inefficient and increasingly strained office-management operations. AthenaHealth (ATHN) provides physicians with a set of Web-based tools that automate billing, collection and medical records. Athena went public last September at $18 and has been chugging ahead since. Trading at about 71 times estimated 2008 earnings, it is not a stock for the faint of heart. The company logged its first profitable quarter last September, squeezing out $512,000 in earnings. Still, it is projecting revenue growth of 30 percent-plus for the next five years, not counting acquisitions. It also faces competition from behemoths like GE, McKesson, and Siemens. But this is the kind of battle more nimble Web-based companies like Athena were made for, and the more success it has, the greater the likelihood that it will look like a tasty acquisition target to its deeper-pocketed rivals.

And then there is Cisco - yes, the networking company. It's true that Cisco (CSCO, Fortune 500) made its bones as tech's largest plumber, but in 2008 its online software efforts might be a standout. One of the reasons CEO John Chambers believes the company can keep growing in an uncertain economy is that businesses will rely more on online collaboration tools to save time and travel budgets. If he's right, Cisco's WebEx subsidiary, a business-focused software-as-a-service player it purchased for $3.2 billion last March, stands to benefit.

WebEx is software for online meetings that adds audio and video to the experience, and its business unit has shown some of the strongest revenue growth recently, up 70 percent last quarter. Wachovia analyst Aaron Rakers wrote in a recent report that he estimates WebEx is already adding more than $100 million in sales for Cisco.

The idea of virtualization has been around for decades, but it took the red-hot IPO of VMware (VMW) last August for the Street to start paying attention. At its most basic, virtualization allows single pieces of hardware - a server or desktop machine in VMware's case - to run multiple operating systems and multiple applications simultaneously. This effectively transforms one machine into several "virtual" machines. You get five, ten, or 15 for the price of one. IDC projects the virtualization services market, worth $6 billion today, will almost double over the next four years.

VMware dominates its market with an estimated 70 percent to 90 percent of the virtualized desktop machines and servers out there. To fend off would-be competitors in 2008, it took a page from the Microsoft playbook and recently cut deals with Dell, Fujitsu, IBM and other computer makers to ship its latest server virtualization software installed on machines.

We were bullish on VMware before its IPO (see "EMC Offers a Slice of Its Surging Software Unit" on fortune.com). At $90, it is not a value, but it's well below a 52-week high of $125, and profits should climb 50 percent next year. Competition looms from Microsoft, Citrix, and Oracle, but Citigroup analyst Brent Thill, who has a buy rating on VMware and a target price of $134 over the next ten months, estimates that the other players are at least 18 months to two years behind it.