Netsol has lost more than half its market cap since the last week of October this year. The stock has fallen from its high of $4.64 to just $2.00 today. Part of this is because of concerns about the US economy in particular and the global economy in general. The first three trading sessions of 2008 have delivered a huge loss to investors in the NASDAQ. Concerns are now running high as to whether the US is headed for a recession. The other part of the concern is around the political situation in Pakistan; the latter we completely discount. Frankly, there is next to no risk to Netsol’s operations in Lahore and regardless of the noise in the US media, there is no credible long term stability concern vis-a-vis Pakistan. What is MUCH more worrying is the impending economic crisis in the US. The mortgage fiasco, rising oil prices, the rapidly depreciating dollar and the continued expense of war is beginning to weigh on things in a very significant way. The latest job growth data, which is at a 4 year low, provides no comfort.

So what is going to happen to Netsol’s stock? Well, first, what’s going to happen to Netsol’s earnings? I think at this point there are real risks. Netsol’s core product – a lease management application – is very heavily dependent on the increase in lending, consumer finance and similar economic activity. Certainly, 2008 is not going to be a great year for this sort of product in the US. In Asia, perhaps it will be better. But Netsol has some exposure here. While Netsol has been trying to expand its customer base in Asia and diversify out of the US, there is going to be a negative impact in my opinon. Now, has the market already taken the extent of this impact into account in halving Netsol’s valuation? Probably. That said, Netsol may suffer an irrational response if it drops much below its current price. If it goes down another 10-20% I would say it would be a steal at the price. Even now, if you’re looking to accumulate slowly over time averaging out costs, it’s probably not a bad time to get in. If you time your buying over a quarter, you’ll hedge against the uncertainty of the next few months.

Look to start slow accumulation if you like Netsol’s business. While there might be a 10-20% downside still it won’t be because of anything wrong with the business. More so because irrational fear will drive it to those levels. Grit your teeth and get ready for what can be a difficult year for investors.