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3 Internet Software Stocks to Buy From a Prospering Industry
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The Zacks Internet Software industry is benefiting from accelerated demand for digital transformation and the ongoing shift to the cloud, as well as the rapid evolution of the Metaverse. The high demand for Software as a Service or SaaS-based solutions due to the increasing need for remote working, learning and diagnosis software, as well as cybersecurity applications, has been a major driver for players like Meta Platforms (META - Free Report) , Fortinet (FTNT - Free Report) and Palo Alto Networks (PANW - Free Report) . The growing demand for solutions, which support hybrid operating environments, is noteworthy. Robust IT spending on software is another positive for industry participants. However, industry players are suffering from increased geopolitical risks due to the Russia-Ukraine conflict, higher wage inflation, currency fluctuations and pandemic-induced supply-chain disruptions.
Industry Description
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. The industry participants 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 reduces significantly, which lowers expenses, thereby driving profits.
Ongoing Transition to Cloud Creating Opportunities: Additionally, the growing need to secure cloud platforms amid the growing incidences of cyber-attacks and hacking drives the demand for web-based cyber security software. Further, 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 #63, which places it in the top 25% 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 2 to 1.
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 2023 have moved up 63.2% since Dec 31, 2022.
Before we present the top industry picks, it is worth looking at the industry’s shareholder returns and current valuation first.
Industry Beats 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 risen 22.2% over this period against the S&P 500 Index’s gain of 13.5% and the broader sector’s growth of 21.1%.
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 2.77X compared with the S&P 500’s 3.95X and the sector’s trailing 12-month P/S of 3.99X.
Over the last three years, the industry has traded as high as 7.24X and as low as 1.63X, with a median of 4.68X, as the charts below show.
Trailing 12-Month Price-to-Sales (P/S) Ratio
3 Stocks to Buy Right Now
Fortinet - This Zacks Rank #1 (Strong Buy) company is benefiting from rising demand for security and networking products amid the growing hybrid working trend. You can see the complete list of today’s Zacks #1 Rank stocks here.
It is also benefiting from robust growth in Fortinet Security Fabric, cloud and Software-defined Wide Area Network offerings. Continued deal wins, especially those of high value, are a key driver.
This Sunnyvale, CA-based company’s shares have gained 60.2% in the year-to-date period. The Zacks Consensus Estimate for Fortinet’s 2023 earnings has remained unchanged at $1.46 per share over the past 30 days.
Price and Consensus: FTNT
Palo Alto Networks - This Santa Clara, CA-based company has been benefiting from continuous deal wins and increasing adoption of the company’s next-generation security platforms, attributable to the rise in remote work environments and the need for stronger security.
Shares of this Zacks Rank #1 company have gained 74.1% year to date. The Zacks Consensus Estimate for PANW’s fiscal 2023 earnings is pegged at $4.27 per share, unchanged over the past 30 days.
Price and Consensus: PANW
Meta - This Zacks Rank #2 (Buy) company is benefiting from steady user growth across all regions, particularly the Asia Pacific. Increased engagement for its products like Instagram, WhatsApp, Messenger and Facebook has been a major growth driver.
Meta’s focus on developing its footprint in the rapidly evolving Metaverse has been a key catalyst. However, the company is suffering from challenging macroeconomic conditions, which are negatively impacting advertising revenues.
Meta shares have gained 144.7% in the year-to-date period. The Zacks Consensus Estimate for the company’s 2023 earnings is pegged at $12.02 per share, up 0.7% in the past 30 days.
Price and Consensus: META
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3 Internet Software Stocks to Buy From a Prospering Industry
The Zacks Internet Software industry is benefiting from accelerated demand for digital transformation and the ongoing shift to the cloud, as well as the rapid evolution of the Metaverse. The high demand for Software as a Service or SaaS-based solutions due to the increasing need for remote working, learning and diagnosis software, as well as cybersecurity applications, has been a major driver for players like Meta Platforms (META - Free Report) , Fortinet (FTNT - Free Report) and Palo Alto Networks (PANW - Free Report) . The growing demand for solutions, which support hybrid operating environments, is noteworthy. Robust IT spending on software is another positive for industry participants. However, industry players are suffering from increased geopolitical risks due to the Russia-Ukraine conflict, higher wage inflation, currency fluctuations and pandemic-induced supply-chain disruptions.
Industry Description
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. The industry participants 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 reduces significantly, which lowers expenses, thereby driving profits.
Ongoing Transition to Cloud Creating Opportunities: Additionally, the growing need to secure cloud platforms amid the growing incidences of cyber-attacks and hacking drives the demand for web-based cyber security software. Further, 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 #63, which places it in the top 25% 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 2 to 1.
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 2023 have moved up 63.2% since Dec 31, 2022.
Before we present the top industry picks, it is worth looking at the industry’s shareholder returns and current valuation first.
Industry Beats 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 risen 22.2% over this period against the S&P 500 Index’s gain of 13.5% and the broader sector’s growth of 21.1%.
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 2.77X compared with the S&P 500’s 3.95X and the sector’s trailing 12-month P/S of 3.99X.
Over the last three years, the industry has traded as high as 7.24X and as low as 1.63X, with a median of 4.68X, as the charts below show.
Trailing 12-Month Price-to-Sales (P/S) Ratio
3 Stocks to Buy Right Now
Fortinet - This Zacks Rank #1 (Strong Buy) company is benefiting from rising demand for security and networking products amid the growing hybrid working trend. You can see the complete list of today’s Zacks #1 Rank stocks here.
It is also benefiting from robust growth in Fortinet Security Fabric, cloud and Software-defined Wide Area Network offerings. Continued deal wins, especially those of high value, are a key driver.
This Sunnyvale, CA-based company’s shares have gained 60.2% in the year-to-date period. The Zacks Consensus Estimate for Fortinet’s 2023 earnings has remained unchanged at $1.46 per share over the past 30 days.
Price and Consensus: FTNT
Palo Alto Networks - This Santa Clara, CA-based company has been benefiting from continuous deal wins and increasing adoption of the company’s next-generation security platforms, attributable to the rise in remote work environments and the need for stronger security.
Shares of this Zacks Rank #1 company have gained 74.1% year to date. The Zacks Consensus Estimate for PANW’s fiscal 2023 earnings is pegged at $4.27 per share, unchanged over the past 30 days.
Price and Consensus: PANW
Meta’s focus on developing its footprint in the rapidly evolving Metaverse has been a key catalyst. However, the company is suffering from challenging macroeconomic conditions, which are negatively impacting advertising revenues.
Meta shares have gained 144.7% in the year-to-date period. The Zacks Consensus Estimate for the company’s 2023 earnings is pegged at $12.02 per share, up 0.7% in the past 30 days.
Price and Consensus: META
