Internet Software Industry Growth Prospects Encouraging

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 compared to legacy systems. SaaS attempts to deliver applications to any user, anywhere, anytime and 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 drives customer satisfaction and 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. Further, 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 growing need to secure cloud platforms, amid growing incidence of cyber attacks and hacking, drives demand for web-based cyber security software. Further, as enterprises continue to move their on-premise workload to cloud environments, application and infrastructure monitoring are gaining 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 #86 that places it in the top 34% 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 bright 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.

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 14.9% over this period compared with the S&P 500 Index’s rise of 4.9% and the broader sector’s return of 0.8%.

One-Year Price Performance




Industry’s Current Valuation

On the basis of trailing 12-month price-to-sales (P/S), which is a commonly used multiple for valuing Internet Software stocks, we see that the industry is currently trading at 7.73X compared with the S&P 500’s 3.28X and the sector’s trailing 12-month P/S of 3.68X.

Over the last five years, the industry has traded as high as 17.15X, as low as 3.69X and at the median of 6.91X, as the chart below shows.

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




Stocks to Watch Out For

Here we present four stocks that carry a Zacks Rank #1 (Strong Buy) or Rank #2 (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.

The Rubicon Project (RUBI): The Zacks Consensus Estimate for this Los Angeles CA-based digital advertising marketplace solutions provider has remained steady at a loss of 33 cents for 2019 over the past 30 days. This Zacks Rank #1 stock has rallied 69.4% on a year-to-date basis.

Price and Consensus: RUBI




Alteryx (AYX): Headquartered in Irvine, CA, this analytics solution provider has returned 84.9% year to date. The 2019 consensus estimate for earnings per share has remained unchanged at 43 cents in the past 30 days. Alteryx has a Zacks Rank #2.

Price and Consensus: AYX





HubSpot (HUBS): This Cambridge, MA-based company provides inbound marketing and sales application over the cloud. The 2019 consensus earnings estimate has moved up by a penny to $1.29 over the past 30 days. This Zacks Rank #2 stock has returned 46.9% on a year-to-date basis.

Price and Consensus: HUBS




PayPal (PYPL): This San Jose, CA-based online payment solutions provider has returned 41.3% year to date. The Zacks Consensus Estimate for 2019 earnings per share has remained steady at $2.98 over the last 30 days. PayPal also carries a Zacks Rank #2.

Price and Consensus: PYPL

Today's Best Stocks from Zacks

Would you like to see the updated picks from our best market-beating strategies? From 2017 through 2018, while the S&P 500 gained +15.8%, five of our screens returned +38.0%, +61.3%, +61.6%, +68.1%, and +98.3%.

This outperformance has not just been a recent phenomenon. From 2000 – 2018, while the S&P averaged +4.8% per year, our top strategies averaged up to +56.2% per year.

See their latest picks free >>