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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. 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 the industry players. The growing demand for solutions that support hybrid operating environments is noteworthy. The increasing deployment of AI and generative AI is driving prospects. The growing proliferation of Augmented and Virtual Reality devices is noteworthy. Increasingly sophisticated cyber-attacks are driving cybersecurity application demand. Meta Platforms (META - Free Report) , Veeva Systems (VEEV - Free Report) and BILL Holdings (BILL - Free Report) are benefiting from these trends. However, heightened geopolitical risks, raging inflation and high interest rates are major headwinds.
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. 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 than 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 the industry participants. Moreover, the SaaS delivery model has supported the industry players 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 #30, which places it in the top 13% 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 outperforms 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 31.5% since Apr 30, 2023.
Given the positive outlook of the industry, there are a number of stocks worth picking for healthy portfolio returns. However, 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, and the S&P 500 Index in the past year.
The industry has risen 57.1% over this period compared with the S&P 500 Index’s jump of 27.7% and the broader sector’s growth of 41.5%.
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 3.48X compared with the S&P 500’s 4.09X and the sector’s trailing 12-month P/S of 5.18X.
Over the last three years, the industry traded as high as 7.43X and as low as 1.67X, with a median of 4.34X, as the charts below show.
Trailing 12-Month Price-to-Sales (P/S) Ratio
3 Stocks to Buy Right Now
Meta Platforms - This Zacks Rank #1 (Strong Buy) company is benefiting from steady user growth across all regions, particularly the Asia Pacific. Increased engagement for its offerings, such as Instagram, WhatsApp, Messenger and Facebook, has been a major growth driver. You can see the complete list of today’s Zacks #1 Rank stocks here.
Meta is leveraging AI to recommend Reels content, which is driving traffic on Instagram and Facebook. Its innovative portfolio, which includes Threads, Reels, Llama 2, Ray-Ban Meta smart glass and mixed reality device Quest 3, is likely to aid prospects.
META shares have gained 38.8% year to date. The Zacks Consensus Estimate for 2024 earnings has been unchanged at $19.94 per share over the past 30 days.
Price and Consensus: META
Veeva Systems - This company is benefiting from the robust customer adoption of its products.
VEEV has inked a few strategic alliances over the past few months, which are expected to drive its prospects. Its latest additions include Recipharm, which is using Veeva Vault QMS, Veeva Vault QualityDocs and Veeva Vault Training to streamline its quality operations. Biopharma giants like GSK and Bayer are using the company’s solutions.
A strong liquidity position makes the stock attractive to investors.
Shares of this Zacks Rank #1 company have gained 19.8% year to date. The Zacks Consensus Estimate for VEEV’s fiscal 2025 earnings is pegged at $6.14 per share, up 11% over the past 30 days.
Price and Consensus: VEEV
BILL Holdings - This Zacks Rank #1 company is benefiting from an expanding small and medium business clientele, as well as a diversified business model. Its large-scale two-sided network simplifies operations, and offers automation and multiple payment choices for both sides of a transaction within a secure and frictionless experience.
BILL Holdings is leveraging AI that makes its solutions easier to use, more automated and predicted. It is also working on integrating generative AI in its solutions to enhance customer experience.
BILL shares have declined 20.9% in the year-to-date period. The Zacks Consensus Estimate for the company’s fiscal 2024 earnings is pegged at $2.21 per share, unchanged in the past 30 days.
Price and Consensus: BILL
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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. 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 the industry players. The growing demand for solutions that support hybrid operating environments is noteworthy. The increasing deployment of AI and generative AI is driving prospects. The growing proliferation of Augmented and Virtual Reality devices is noteworthy. Increasingly sophisticated cyber-attacks are driving cybersecurity application demand. Meta Platforms (META - Free Report) , Veeva Systems (VEEV - Free Report) and BILL Holdings (BILL - Free Report) are benefiting from these trends. However, heightened geopolitical risks, raging inflation and high interest rates are major headwinds.
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. 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 than 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 the industry participants. Moreover, the SaaS delivery model has supported the industry players 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 #30, which places it in the top 13% 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 outperforms 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 31.5% since Apr 30, 2023.
Given the positive outlook of the industry, there are a number of stocks worth picking for healthy portfolio returns. However, 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, and the S&P 500 Index in the past year.
The industry has risen 57.1% over this period compared with the S&P 500 Index’s jump of 27.7% and the broader sector’s growth of 41.5%.
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 3.48X compared with the S&P 500’s 4.09X and the sector’s trailing 12-month P/S of 5.18X.
Over the last three years, the industry traded as high as 7.43X and as low as 1.67X, with a median of 4.34X, as the charts below show.
Trailing 12-Month Price-to-Sales (P/S) Ratio
3 Stocks to Buy Right Now
Meta Platforms - This Zacks Rank #1 (Strong Buy) company is benefiting from steady user growth across all regions, particularly the Asia Pacific. Increased engagement for its offerings, such as Instagram, WhatsApp, Messenger and Facebook, has been a major growth driver. You can see the complete list of today’s Zacks #1 Rank stocks here.
Meta is leveraging AI to recommend Reels content, which is driving traffic on Instagram and Facebook. Its innovative portfolio, which includes Threads, Reels, Llama 2, Ray-Ban Meta smart glass and mixed reality device Quest 3, is likely to aid prospects.
META shares have gained 38.8% year to date. The Zacks Consensus Estimate for 2024 earnings has been unchanged at $19.94 per share over the past 30 days.
Price and Consensus: META
Veeva Systems - This company is benefiting from the robust customer adoption of its products.
VEEV has inked a few strategic alliances over the past few months, which are expected to drive its prospects. Its latest additions include Recipharm, which is using Veeva Vault QMS, Veeva Vault QualityDocs and Veeva Vault Training to streamline its quality operations. Biopharma giants like GSK and Bayer are using the company’s solutions.
A strong liquidity position makes the stock attractive to investors.
Shares of this Zacks Rank #1 company have gained 19.8% year to date. The Zacks Consensus Estimate for VEEV’s fiscal 2025 earnings is pegged at $6.14 per share, up 11% over the past 30 days.
Price and Consensus: VEEV
BILL Holdings - This Zacks Rank #1 company is benefiting from an expanding small and medium business clientele, as well as a diversified business model. Its large-scale two-sided network simplifies operations, and offers automation and multiple payment choices for both sides of a transaction within a secure and frictionless experience.
BILL Holdings is leveraging AI that makes its solutions easier to use, more automated and predicted. It is also working on integrating generative AI in its solutions to enhance customer experience.
BILL shares have declined 20.9% in the year-to-date period. The Zacks Consensus Estimate for the company’s fiscal 2024 earnings is pegged at $2.21 per share, unchanged in the past 30 days.
Price and Consensus: BILL
