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3 Internet Software Stocks to Buy From a Prospering Industry
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The Zacks Internet Software industry has been 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 a key catalyst. The increasing deployment of AI and generative AI is driving prospects. The growing proliferation of Augmented and Virtual Reality devices is noteworthy. Increasingly sophisticated cyberattacks have been driving cybersecurity application demand. Arista Networks (ANET - Free Report) , monday.com (MNDY - Free Report) and Paylocity Holdings (PCTY - Free Report) are benefiting from these trends. However, heightened geopolitical risks, persistent inflation and high interest rates are major headwinds.
Industry Description
The Zacks Internet Software industry comprises companies offering application performance monitoring, infrastructure and application software, DevOps deployment and Security software. Industry participants offer online payment solutions, asset optimization software, multi-cloud application security and delivery, social networking, 3D printing applications, and cloud content management 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, construction, consumer packaged goods, education, energy, legal, various service providers, federal governments, and animal health technology and services.
3 Trends Shaping the Future of the Internet Software Industry
Adoption of SaaS Grows: The industry has been benefiting from the continued demand for digital transformation. Growth prospects are alluring due to the rapid adoption of SaaS, which offers a flexible and cost-effective delivery method for 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 the industry participants. Moreover, the SaaS delivery model has supported industry players in delivering software applications amid the coronavirus-led lockdowns and shelter-in-place guidance. Remote work, learning and health diagnosis have also boosted the demand for SaaS-based software applications.
Pay-As-You-Go Model Gains 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 according to different user needs. The subscription-based business model ensures recurring revenues for 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, driving profits.
Ongoing Transition to Cloud Creates Opportunities: The growing need to secure cloud platforms amid the increasing incidences of cyberattacks and hacking drives the demand for web-based cybersecurity 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 #53, which places it in the top 22% 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 2025 have moved up 3.4% since June 30, 2024.
Given the positive outlook of the industry, there are several 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 S&P 500 and Sector
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 returned 34.1% over this period compared with the S&P 500’s jump of 12.1% and the broader sector’s appreciation of 12.7%.
One-Year Price Performance
Industry's Current Valuation
On the basis of forward 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 5.33X compared with the S&P 500’s 5.07X and the sector’s forward 12-month P/S of 6.22X.
Over the last five years, the industry has traded as high as 5.83X and as low as 4.4X, with a median of 4.89X, as the charts below show.
Forward 12-Month Price-to-Sales (P/S) Ratio
3 Stocks to Buy Right Now
monday.com - This Zacks Rank #1 (Strong Buy) company is benefiting from portfolio strength (multi-product offering) and continued focus on operational excellence. You can see the complete list of today’s Zacks #1 Rank stocks here.
Expanding product portfolio with the launch of new monday work management capabilities and AI-powered features (AI-powered risk insights, AI-powered portfolio reports, managed templates, and resource planning capabilities) is a key catalyst. At the end of the first quarter of 2025, MNDY users performed more than 26 million AI actions, up more than 150% since the end of 2024.
monday.com shares have appreciated 24.5% year to date. The Zacks Consensus Estimate for 2025 earnings has surged 12% to $3.72 per share over the past 30 days.
Price and Consensus: MNDY
Paylocity Holdings - This Zacks Rank #1 company is benefiting from a comprehensive suite of cloud-based Human Capital Management and payroll software solutions tailored for mid-sized businesses. Paylocity’s recurring revenue model, which provides financial stability and predictability, is driven by high client satisfaction and low churn rates. This bodes well for top-line growth.
Paylocity shares have declined 5.2% year to date. The Zacks Consensus Estimate for PCTY’s fiscal 2025 earnings is pegged at $7.01 per share, up 5.4% over the past 30 days.
Price and Consensus: PCTY
Arista Networks – A Zacks Rank #2 (Buy) company, Arista Networks is benefiting from a strong portfolio, which is highly scalable, programmable and provides data-driven automation, analytics and support services.
Arista continues to benefit from the expanding cloud networking market, which is driven by the strong demand for scalable infrastructure. The growing demand for 200- and 400-gig high-performance switching products augurs well for Arista Networks’ long-term growth.
The company’s shares have dropped 21.9% in the year-to-date period. The Zacks Consensus Estimate for its 2025 earnings is pegged at $2.56 per share, up 3.6% in the past 30 days.
Price and Consensus: ANET
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3 Internet Software Stocks to Buy From a Prospering Industry
The Zacks Internet Software industry has been 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 a key catalyst. The increasing deployment of AI and generative AI is driving prospects. The growing proliferation of Augmented and Virtual Reality devices is noteworthy. Increasingly sophisticated cyberattacks have been driving cybersecurity application demand. Arista Networks (ANET - Free Report) , monday.com (MNDY - Free Report) and Paylocity Holdings (PCTY - Free Report) are benefiting from these trends. However, heightened geopolitical risks, persistent inflation and high interest rates are major headwinds.
Industry Description
The Zacks Internet Software industry comprises companies offering application performance monitoring, infrastructure and application software, DevOps deployment and Security software. Industry participants offer online payment solutions, asset optimization software, multi-cloud application security and delivery, social networking, 3D printing applications, and cloud content management 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, construction, consumer packaged goods, education, energy, legal, various service providers, federal governments, and animal health technology and services.
3 Trends Shaping the Future of the Internet Software Industry
Adoption of SaaS Grows: The industry has been benefiting from the continued demand for digital transformation. Growth prospects are alluring due to the rapid adoption of SaaS, which offers a flexible and cost-effective delivery method for 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 the industry participants. Moreover, the SaaS delivery model has supported industry players in delivering software applications amid the coronavirus-led lockdowns and shelter-in-place guidance. Remote work, learning and health diagnosis have also boosted the demand for SaaS-based software applications.
Pay-As-You-Go Model Gains 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 according to different user needs. The subscription-based business model ensures recurring revenues for 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, driving profits.
Ongoing Transition to Cloud Creates Opportunities: The growing need to secure cloud platforms amid the increasing incidences of cyberattacks and hacking drives the demand for web-based cybersecurity 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 #53, which places it in the top 22% 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 2025 have moved up 3.4% since June 30, 2024.
Given the positive outlook of the industry, there are several 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 S&P 500 and Sector
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 returned 34.1% over this period compared with the S&P 500’s jump of 12.1% and the broader sector’s appreciation of 12.7%.
One-Year Price Performance
Industry's Current Valuation
On the basis of forward 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 5.33X compared with the S&P 500’s 5.07X and the sector’s forward 12-month P/S of 6.22X.
Over the last five years, the industry has traded as high as 5.83X and as low as 4.4X, with a median of 4.89X, as the charts below show.
Forward 12-Month Price-to-Sales (P/S) Ratio
3 Stocks to Buy Right Now
monday.com - This Zacks Rank #1 (Strong Buy) company is benefiting from portfolio strength (multi-product offering) and continued focus on operational excellence. You can see the complete list of today’s Zacks #1 Rank stocks here.
Expanding product portfolio with the launch of new monday work management capabilities and AI-powered features (AI-powered risk insights, AI-powered portfolio reports, managed templates, and resource planning capabilities) is a key catalyst. At the end of the first quarter of 2025, MNDY users performed more than 26 million AI actions, up more than 150% since the end of 2024.
monday.com shares have appreciated 24.5% year to date. The Zacks Consensus Estimate for 2025 earnings has surged 12% to $3.72 per share over the past 30 days.
Price and Consensus: MNDY
Paylocity Holdings - This Zacks Rank #1 company is benefiting from a comprehensive suite of cloud-based Human Capital Management and payroll software solutions tailored for mid-sized businesses. Paylocity’s recurring revenue model, which provides financial stability and predictability, is driven by high client satisfaction and low churn rates. This bodes well for top-line growth.
Paylocity shares have declined 5.2% year to date. The Zacks Consensus Estimate for PCTY’s fiscal 2025 earnings is pegged at $7.01 per share, up 5.4% over the past 30 days.
Price and Consensus: PCTY
Arista continues to benefit from the expanding cloud networking market, which is driven by the strong demand for scalable infrastructure. The growing demand for 200- and 400-gig high-performance switching products augurs well for Arista Networks’ long-term growth.
The company’s shares have dropped 21.9% in the year-to-date period. The Zacks Consensus Estimate for its 2025 earnings is pegged at $2.56 per share, up 3.6% in the past 30 days.
Price and Consensus: ANET