Back in mid-March, Cornerstone OnDemand (Nasdaq:CSOD) launched its initial public offering, even though the market was fairly rocky because of the major earthquake in Japan.  On its first day of trading, the shares jumped 46.7% to $19.07. 

Then again, Cornerstone is a leading player in “cloud computing,” which involves delivering technology via the Internet, which often lessens the costs for corporations by lessening need to pay for servers and other technology. 

Last Thursday, the company offered its first quarterly report as a public company.  And it was definitely strong — revenue was up a sizzling 63% to $15.7 million and bookings were up 55% to $14.3 million.

So what about the next year or so?  Can Cornerstone continue its momentum?  Let’s take a look:

Pros

Platform.  Cornerstone develops business software, which has five “modules:” learning management, enterprise social networking, performance management, succession planning and extended enterprise.

Cornerstone has more than 560 clients, which include biggies like Barclays Bank (NYSE:BCS), Liberty Mutual Insurance and Starwood Hotels (NYSE:HOT).  There are also 5.2 million users, up 80% over the past year. 

The market.  Last year, the civilian workforce in the U.S. was 154 million people and total compensation was $9.1 trillion.  Unfortunately, nearly all companies have difficulties cultivating the productivity and effectiveness of their employees. 

As a result, they are looking for help from new technologies.  According to IDC, the market is about $3.6 billion. 

Aggressive marketing.  Cornerstone has been highly successful with distribution partnerships.  One of its most important is with ADP (NYSE:ADP), which has been a big help in landing big customers.  Now it looks like the relationship is starting to expand into international markets. 

Cons

Lumpiness.  Because of its focus on larger customers, the revenue base can be variable from quarter to quarter.  The reason is the long sales cycle.  Moreover, if the economy falters,

There will inevitably be delays in spending. 

Competition.  Cornerstone must contend with many tough rivals, including Jive Software,

Oracle (Nasdaq:ORCL), Saba (Nasdaq:SABA), SuccessFactors (Nasdaq:SFSF) and Taleo (Nasdaq:TLEO).

Valuation.  The stock is far from cheap.  Consider that it is trading at 20 times revenue for the past 12 months.  Also, the company is still not turning a profit. 

Verdict

It looks like Cornerstone’s business will remain strong.  The company is expanding into new segments, like the public sector and small businesses.  At the same time, Cornerstone has had success selling more modules to existing customers. As a testament to Cornerstone’s product offering, it has about a 95% annual dollar retention rate. 

While the valuation is a bit frothy, the fact is that the company is growing at a fast rate.  After all, this was the situation with Salesforce.com (NYSE:CRM) when it had its IPO in 2005.  Over the long haul, the company was able to produce strong returns for investors.

In light of the market potential as well as its strong partnership strategy, the pros outweigh the cons on Cornerstone.

Tom Taulli’s latest book is “All About Short Selling” and he has an upcoming book called “All About Commodities.”  You can find him at Twitter account @ttaulli.  He does not own a position in any of the stocks named here.