One of hottest areas in technology right now is Software-as-a-Service, or SaaS for short. SaaS is the B2B equivalent to the consumer Web, and just as the B2B sector is much larger than the B2C sector in general, SaaS promises to be far larger than the consumer Internet.

SaaS lets businesses rent applications on an on-demand basis (generally paying per user per month) rather than purchasing an up front “perpetual license” and paying an ongoing annual maintenance fee for upgrades and customer service (generally about 20% of the license cost).

This makes SaaS very attractive for its customers, who don’t need to shell out millions up front for software that might end up as shelfware. As a result, SaaS companies like Salesforce.com (CRM) have outperformed traditional software stocks like Oracle (ORCL).

But what happens now that the economy is slowing? Will SaaS high-fliers plunge back to Earth, or will they continue to outperform?

My belief is that the lower up-front investments required for SaaS, coupled with the continuing trend towards on-demand, will cause SaaS stocks to outperform during an economic downturn.

This belief was reinforced by a recent lunch I had with a friend who is a well-known hedge fund investor who specializes in technology stocks. We discussed this very subject, and he brought up a conversation he had with one of his CIO buddies.

He had asked this CIO if he planned to cut back on his SaaS investments if the economy slowed. The CIO pointed out that because he had signed a 2-year contract with Salesforce.com, committing to a higher volume to get a lower price, he would have to cut at least 50% of his seats just to come out ahead. As a result, he planned to maintain his planned spending, and possibly even increase it if he could use it to avoid hefty capital expenditures on traditional software.

So if the prospect of a recession leaves you wondering where to allocate your tech industry investments, consider upping your exposure to SaaS.

Stocks: CRM, RNOW, BBBB, OMTR