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The Zacks Internet Software industry is benefiting from accelerated demand for digital transformation and the ongoing shift to the cloud. The high demand for Software as a Service or SaaS-based solutions due to the increasing need for remote working, learning and diagnosis software has been a major driver for industry players. The growing demand for solutions that support hybrid operating environments is noteworthy. The growing proliferation of Augmented & Virtual Reality devices is noteworthy. Increasingly sophisticated cyber-attacks are driving cybersecurity application demand. Robust IT spending on software is a positive for industry participants. Snap SNAP, MongoDB MDB and Zoom Video Communications ZM are benefiting from these trends. However, heightened geopolitical risks, raging inflation and high interest rates are major headwinds.
The Zacks Internet Software industry comprises companies offering application performance monitoring, as well as infrastructure and application software, DevOps deployment and Security software. Industry participants offer multi-cloud application security and delivery, social networking, online payment and 3D printing applications and solutions. They use the SaaS-based cloud computing model to deliver solutions to end-users, as well as enterprises. Hence, subscription is the primary revenue source. Advertising is also a major revenue source. Industry participants target a variety of end markets, including banking and financial services, service providers, federal governments and animal health technology and services.
3 Trends Shaping the Future of the Internet Software Industry
Adoption of SaaS Growing: The industry is benefiting from the continued demand for digital transformation. Growth prospects are alluring, primarily due to the rapid adoption of SaaS, which offers a flexible and cost-effective delivery method of applications. It also cuts down on deployment time compared with legacy systems. SaaS attempts to deliver applications to any user, anywhere, anytime and on any device. It has been effective in addressing customer expectations of seamless communications across multiple channels, including voice, chat, email, web, social media and mobile. This increases customer satisfaction and raises the retention rate, driving the top lines of industry participants. Moreover, the SaaS delivery model has supported the industry participants to deliver software applications amid the coronavirus-led lockdowns and shelter-in-place guidance. Remote working, learning and diagnosis have also boosted the demand for SaaS-based software applications.
Pay-As-You-Go Model Gaining Traction: The increasing customer-centric approach is allowing end-users to perform all required actions with minimal intervention from software providers. The pay-as-you-go model helps Internet Software providers scale their offerings per the needs of different users. The subscription-based business model ensures recurring revenues for the industry participants. The affordability of the SaaS delivery model, particularly for small and medium-sized businesses, is another major driver. The cloud-based applications are easy to use. Hence, the need for specialized training is reduced significantly, which lowers expenses, thereby driving profits.
Ongoing Transition to Cloud Creating Opportunities: The growing need to secure cloud platforms amid the increasing incidences of cyber-attacks and hacking drives the demand for web-based cyber security software. As enterprises continue to move their on-premise workload to cloud environments, application and infrastructure monitoring is gaining importance. This is increasing the demand for web-based performance management monitoring tools.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Internet Software industry, placed within the broader Zacks Computer And Technology sector, carries a Zacks Industry Rank #29, which places it in the top 12% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is 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 outperform the bottom 50% by a factor of more than two to one.
The industry’s position in the top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are optimistic about this group’s earnings growth potential. The industry’s earnings estimates for 2024 have moved up 60.8% since Jan 31, 2023.
Before we present the top industry picks, it is worth looking at the industry’s shareholder returns and current valuation first.
Industry Beats Sector, 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 risen 70.4% over this period compared with the S&P 500 Index’s gain of 22.9% and the broader sector’s growth of 47.5%.
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 3.06X compared with the S&P 500’s 3.99X and the sector’s trailing 12-month P/S of 4.64X.
Over the last three years, the industry has traded as high as 7.34X and as low as 1.65X, with a median of 4.58X, as the charts below show.
Trailing 12-Month Price-to-Sales (P/S) Ratio
3 Stocks to Buy Right Now
Snap – This Zacks Rank #1 (Strong Buy) company is riding on user growth and improving user engagement, driven by the strong adoption of Augmented Reality Lenses, Discover content, Shows and Snap Map, which are used by 350 million users on a monthly basis. You can see the complete list of today’s Zacks #1 Rank stocks here.
Snap’s expanding partner base, with the likes of ITV in the U.K. and ESPN in the Netherlands, is noteworthy.
This Venice, CA-based company’s shares have gained 81% in the trailing 12-month period. The Zacks Consensus Estimate for Snap’s 2024 earnings has been unchanged at 13 cents per share over the past 30 days.
Price and Consensus: SNAP
MongoDB – This company is benefiting from strong demand for Atlas. MDB’s clientele increased by roughly 1,400 customers sequentially to 46,400 customers at the end of third-quarter fiscal 2024.
Shares of this Zacks Rank #1 company have gained 108% in the past year. The Zacks Consensus Estimate for MongoDB’s fiscal 2024 earnings is pegged at $2.90 per share, unchanged over the past 30 days.
Price and Consensus: MDB
Zoom Video – Another Zacks Rank #1 company, it is benefiting from steady growth in subscriber base and enterprise customer base backed by strong demand for offerings like Zoom Phone. The launch of AI-driven solutions like Zoom Doc and Zoom AI Companion holds promise.
Zoom Video shares have declined 3.6% in the trailing 12-month period. The Zacks Consensus Estimate for the company’s fiscal 2024 earnings is pegged at $4.94 per share, unchanged in the past 30 days.
Price and Consensus: ZM
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