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Internet-Software & Services Outlook: A Buying Opportunity

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The Internet Software & Services industry is a relatively small industry primarily involved in enabling platforms, networks, solutions and services for online businesses and facilitating customer interaction and use of Internet based services.    

Here are the three major themes in the industry:

·         As businesses increasingly move their operations to the cloud, the demand for enabling software and services will continue to increase. This means high costs for players as they continue to expand their offerings in the race to grab more business. As a result, most players continue to make little to no profit despite strong revenue growth. 

·         It follows that the general level of industrial growth and progress also impacts the amount of business transacted online.

·         The level of technology adoption by businesses and the proliferation of connected consumer devices that might help people connect and do business online also impacts growth. As a result of the high penetration of mobile devices among users, it now makes sense for businesses to adopt technology that they earlier stayed away from because of the cost involved.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Internet – Software & Services industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #71, which places it at the bottom 28% 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 that near-term prospects remain bright. 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 positioning 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. In the past year, the industry’s earnings estimate for the current year is up a whopping 784.6%.

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’s Stock Market Performance Is Impressive

The past year’s performance of the Zacks Internet – Software & Services Industry shows a net gain over the broader Zacks Computer and Technology Sector and a net lag with respect to the S&P 500 index.

The industry has declined 9.1% over this period compared to the S&P 500 index’s decline of 6.6% and broader sector’s decline of 9.5%.

One-Year Price Performance

 

Industry’s Current Valuation

On the basis of forward 12-month price-to-earnings (P/E) ratio, which is a commonly used multiple for valuing Internet companies, we see that the industry is currently trading at 32.5X compared to the S&P 500’s 15.8X. It is also overvalued compared to the sector’s forward-12-month P/E of 18.0.

In fact, the industry is currently trading at the upper end of its annual range of 28.54X to 33.88X and therefore, also above the median of 30.00X, as the chart below shows.

Forward 12 Month Price-to-Earnings (P/E) Ratio

 

Bottom Line

The Zacks Internet – Software & Services market should continue to see secular revenue growth because the underlying drivers are strong. However, profitability will take time. So it’s mainly recommended for long-term investors.

Buy ranked stocks aren’t hard to find in the Zacks Internet – Software & Services market. So here are three of our picks with a Zacks Rank #1 (Strong Buy) ot Zacks Rank #2 (Buy).

You can see the complete list of today’s Zacks #1 Rank stocks here.

Talend S.A. (TLND - Free Report) : Shares of this provider of big data and cloud integration solutions saw a correction in November and are currently at the year-ago level (-0.1%). Its current Zacks Consensus EPS Estimate has remained stable over the last 30 days.

Price and Consensus: TLND

 

Adesto Technologies Corp. (IOTS - Free Report) : This leading provider of application-specific non-volatile memory products has seen a 24.6% erosion in its share price over the past year.  Its current Zacks Consensus EPS Estimate has remained stable in the last 30 days.

Price and Consensus: IOTS

 

Boingo Wireless, Inc. (WIFI - Free Report) : This Wi-Fi software and services provider saw its share price rise 1.6% in the past year. Its current Zacks Consensus EPS Estimate has remained stable in the last 30 days.

Price and Consensus: WIFI

 

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In-Depth Zacks Research for the Tickers Above


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