Internet Software Industry Outlook: Growth Prospects Rich

The Zacks Internet software industry primarily comprises software infrastructure and application providers. The industry participants use Software-as-a-Service (SaaS) cloud computing model to deliver solutions to end-users as well as enterprises.

Here are the three major industry themes:

• The Zacks Internet software industry is benefiting from continued demand for digital transformation. Growth prospects are alluring primarily due to rapid adoption of SaaS, which offers a flexible and cost-effective delivery method of applications. It also cuts down on deployment time when compared to legacy systems. SaaS attempts to deliver applications to any user, anywhere, anytime, on any device. It has been effective in addressing customer expectation of seamless communications across multiple channels, including voice, chat, email, web, social media and mobile. This is driving customer satisfaction that eventually increases retention rate, thereby driving the top line of industry participants.
• The increasing customer-centric approach is allowing end-users to perform all the required actions, while minimal intervention is needed from the software provider’s side. Moreover, the pay-as-you-go model helps Internet Software providers scale their offerings according to the needs of different users. Moreover, the subscription-based business model ensures recurring revenues for industry participants. The affordability of the SaaS delivery model, particularly for small and medium businesses, is also a major driver. The cloud-based applications are easy to use. Hence, the need for specialized training reduces significantly, which lowers expenses, thereby driving profits.
• Additionally, the increasing need to secure cloud platforms, amid growing incidences of cyber attacks and hacking, continues to drive demand for web-based cyber security software. Further, as enterprises continue to move their on-premise workload to cloud environments, application and infrastructure monitoring have gained utmost importance. This is creating more demand for web-based performance management monitoring tools. However, increasing worldwide regulations related to data privacy, and data protection and accessibility do not bode well for the industry participants.

Zacks Industry Rank Indicates Solid Prospects

The Zacks Internet software Industry, within the broader Zacks Computer And Technology Sector, carries a Zacks Industry Rank #37 that places it at the top 15% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates solid near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s position in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gaining confidence in this group’s earnings growth potential. Since Oct 31, 2018, the industry’s earnings estimates for 2019 have moved 35% up.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Outperforms Sector and S&P 500

The Zacks Internet Software industry has outperformed the broader Zacks Computer And Technology sector as well as the S&P 500 index in the past year.

The industry has rallied 17.8% over this period compared with the S&P 500 index’s rise of 1.9% and the broader sector’s increase of 0.3%.

One-Year Price Performance

Industry’s Current Valuation

On the basis of the trailing 12-month price-to-sales ratio (P/S), which is a commonly used multiple for valuing Internet Software stocks, we see that the industry is currently trading at 6.88X compared with the S&P 500’s 3.18X and the sector’s trailing 12-month P/S of 3.32X.

Over the last five years, the industry has traded as high as 20.08X, as low as 3.69X and at the median of 6.88X, as the chart below shows.

Trailing 12-Month Price-to-Sales (P/S) Ratio




Stocks to Watch Out

Here, we present four stocks that flaunt a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here. These stocks are well positioned to grow in the near term.

AudioEye (AEYE): The 2019 consensus estimate for this Tucson AZ-based web accessibility solutions provider has remained steady at a loss of 36 cents over the past 30 days. The stock has rallied 54.4% over the past year.

Price and Consensus: AEYE

Benefitfocus (BNFT): Headquartered in Charleston, SC, this cloud-based benefits management platform solution provider has returned 125.9% over the past year. The 2019 consensus estimate remained unchanged at a loss of 30 cents in the past 30 days.

Price and Consensus: BNFT

The Meet Group (MEET): This New Hope, PA-based company operates a live-streaming video platform, empowering the global community to forge meaningful connections. The 2019 consensus earnings estimate has moved 4.9% up over the past 30 days. The stock has returned 127% in the past year.

Price and Consensus: MEET

Twitter (TWTR): This San Francisco, CA-based company has returned 36.2% over the past year. The Zacks Consensus Estimate for 2019 earnings has remained steady at 88 cents over the last 30 days.

Price and Consensus: TWTR

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