The Zacks Internet Software industry is benefiting from accelerated demand for digital transformation and the ongoing shift to cloud. Moreover, high demand for SaaS due to increasing need for remote working, learning and diagnosis software as well as cybersecurity applications has been a major driving factor amid the disruptions caused by the coronavirus outbreak.
Industry participants like Pinterest (PINS), J2 Global (JCOM), Digital Turbine (APPS) and NIC (EGOV) are gaining from accelerated demand for social networking, cloud and digital services. However, a number of industry participants are dependent on advertising spending by customers, which is expected to remain sluggish due to coronavirus-related headwinds.
The Zacks Internet Software industry primarily comprises software infrastructure and application providers like F5 Networks (FFIV). Social media providers like Pinterest and Twitter (TWTR) and online payments company Paypal (PYPL) are also notable companies in this industry.
The industry participants use SaaS-based cloud computing model to deliver solutions to end-users as well as enterprises.
4 Trends Shaping the Future of the Internet Software Industry
Growing Adoption of SaaS: The 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. Moreover, the SaaS delivery model has supported industry participants to deliver software applications amid coronavirus-led lockdowns and shelter-in-place guidance. Remote working, learning and diagnosis have also boosted 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 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.
Ongoing Transition to Cloud Creates Opportunities: 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.
Regulations Marring Prospects: Increasing worldwide regulations related to data privacy, and data protection and accessibility do not bode well for the industry participants. The implementation of General Data Protection Regulation, which took effect on May 25, 2018 in the EU, adds to the concerns. Moreover, California Consumer Privacy Act (CCPA), which restricts sales of user data among other things, is a headwind to industry participants. Further, lower ad-spending due to the coronavirus outbreak hinders sector growth.
Zacks Industry Rank Indicates Dim Prospects
The Zacks Internet Software industry, within the broader Zacks Computer And Technology sector, carries a Zacks Industry Rank #179 that places it in the bottom 30% 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 dim 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.
Despite the gloomy industry outlook, few stocks have the potential to outperform the market. But before we present the top industry picks, it is worth taking a look at the industry’s shareholder returns and current valuation first.
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 80.3% over this period compared with the S&P 500 Index’s rise of 15.3% and the broader sector’s return of 35%.
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 9.32X compared with the S&P 500’s 4.20X and the sector’s trailing 12-month P/S of 4.26X.
Over the last five years, the industry has traded as high as 9.32X, as low as 4.30X and at the median of 5.47X, as the chart below shows.
Trailing 12-Month Price-to-Sales (P/S) Ratio
4 Stocks to Buy Right Now
NIC – NIC is benefiting from the accelerating rate of digital governance and mix shift to SaaS. The company’s expanding customer base is a key catalyst. In the recently concluded third-quarter 2020, this Zacks Rank #1 (Strong Buy) company added the states of Iowa and Florida as customers. Moreover, this Olathe, KS-based company is benefiting from COVID-19 testing partnerships and the momentum is expected to continue in the near term. You can see the complete list of today’s Zacks #1 Rank stocks here.
NIC’s shares have returned 10.2% year to date. The Zacks Consensus Estimate for its 2020 earnings has risen 33% to $1.01 per share in the past 30 days.
Price and Consensus: EGOV
Pinterest – This San Francisco-based social networking company is benefiting from user base expansion boosted by coronavirus-led lockdown. Availability of features like Today and Shop tab for Pinners are key catalysts. Moreover, enhanced product offerings, wider Pinner and advertiser base, simplified ad systems through Verified Merchant Program and Pinterest Partners Program for small businesses are key catalysts. Growing Gen Z and millennial user base is a driver in the long haul. Additionally, partnership with Shopify is helping smaller merchants to get on Pinterest.
Shares of this Zacks Rank #2 (Buy) company have returned a whopping 236% year to date. The Zacks Consensus Estimate for the company’s 2020 earnings stands at 31 cents per share, up 343% in the past 30 days.
Price and Consensus: PINS
J2 Global – J2 Global’s advertising business has low exposure to local, travel, food, and automotive, industry verticals most affected by the coronavirus, which has been positive for overall business. This along with healthy display business (almost 40% healthcare) is driving top-line growth. Cloud Services is expected to benefit from the company’s growing privacy and corporate fax businesses. Moreover, the coronavirus-led work-from-home wave bodes well as J2 Global’s security, privacy and voice services are considered indispensable for a remote working set-up.
This Zacks #2 Ranked company’s stock has lost 8.5% year to date. The consensus mark for its 2020 earnings is pegged at $7.92 per share, having moved up 8.8% in the past 30 days.
Price and Consensus: JCOM
Digital Turbine – This Austin, TX-based company is benefiting from robust demand for its cloud-based mobile software offerings as enterprises continued the shift from on-premise to cloud environments, especially amid the coronavirus lockdown. Additionally, momentum in the company’s mobile device management platform is a key catalyst. Moreover, this Zacks Rank #2 company’s diversified partner base, a large content business partner and rollouts with newer international partners are expected to drive top-line growth.
Digital Turbine’s shares have lost 8.5% year to date. The consensus mark for its fiscal 2021 earnings has risen 32% to 62 cents per share in the past 30 days.
Price and Consensus: APPS
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Twitter, Inc. (TWTR): Free Stock Analysis Report
PayPal Holdings, Inc. (PYPL): Free Stock Analysis Report
Pinterest, Inc. (PINS): Free Stock Analysis Report
j2 Global, Inc. (JCOM): Free Stock Analysis Report
F5 Networks, Inc. (FFIV): Free Stock Analysis Report
NIC Inc. (EGOV): Free Stock Analysis Report
Digital Turbine, Inc. (APPS): Free Stock Analysis Report
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