The Internet-Software & Services industry is highly correlated to the economy; consequently, estimates earlier moved down in anticipation of the negative impact of tariffs, inflation and interest rate decisions that typically increase economic uncertainty. However, the economy remained relatively steady despite incremental caution on the labor market.

Currently, tensions in the Middle East and the fear of lost sales are strengthening oil prices, with the strong dollar and U.S. production acting as stabilizers. Dividends are common, having increased in aggregate from around 26 cents to $1.42 in the last five years, which supports share prices and makes this an attractive segment for investors, especially those looking for additional income.
 
In this background, companies like Donnelley Financial (DFIN Quick QuoteDFIN - Free Report) and Red Violet (RDVT Quick QuoteRDVT - Free Report) are standing out for a couple of reasons. First, while not immune to macro concerns, they have developed systems of client retention through subscriptions and platforms. Second, they are both very successfully leveraging AI in operations.
 
Being the backbone of the digital economy, it’s hard to see this industry doing badly over the long term. The diversity of players in this group leads to some dissonance.
 
Valuations remain depressed despite the fact that estimates have recovered from their September lows, making the group quite attractive at these levels.

About the Industry

The Internet Software & Services industry is a relatively small industry primarily involved in enabling platforms, networks, solutions and services for online businesses, including online communication, commerce, data analysis, cybersecurity, collaboration and digital infrastructure, and facilitating customer interaction and use of Internet based services. Most companies operate under Software-as-a-Service (SaaS) or platform models, where customers access applications through web browsers or APIs rather than installing software locally. 

Top Themes Driving the Industry

• Cloud adoption is one of the most powerful long-term drivers of the Internet Software & Services industry. Companies are steadily replacing traditional on-premise software — which required local servers, maintenance and large upfront investments — with cloud-based applications delivered over the internet. Cloud platforms allow organizations to scale usage up or down quickly, reduce IT infrastructure costs and deploy software updates automatically without operational disruption. This shift also enables faster innovation, as employees and customers can access systems securely from any location or device. For software providers, cloud delivery transforms revenue from one-time license sales into recurring subscriptions, improving visibility and customer lifetime value. Because migrating systems is complex and costly, customers tend to remain on chosen platforms for years, creating high switching costs and durable revenue streams across the industry.

 

• The level of technology adoption by businesses impacts growth. Companies continue to build platforms facilitating the development and use of artificial intelligence, scrambling to digitize operations, customer interactions and internal workflows to improve efficiency and competitiveness. This in turn accelerates the adoption of technology that can help collect and analyze data, whether on-premise or in the cloud.  Additionally, today we have many more cloud-first companies than ever before. AI and advanced analytics are becoming embedded in software platforms, enabling automation, predictive decision-making, and personalization. These Internet software platforms automate processes such as payments, analytics, marketing and compliance, making them essential operating tools rather than optional technology.

 

• Cybersecurity and Identity Protection are fast-growing segments of the market. As economic activity rapidly moves online, the number of digital identities, transactions and connected systems has also increased with a corresponding increase in exposure to cybercrime and fraud. Businesses now handle sensitive customer data, financial transactions and remote access across cloud environments, making security and identity verification mission-critical rather than optional IT spending. As cyberattacks, account takeovers and synthetic identity fraud become more sophisticated, organizations must invest in software that can continuously monitor users, verify identities, detect suspicious behavior and comply with tightening regulatory requirements. The stricter data protection and compliance standards are forcing companies to adopt specialized security and risk-management platforms. Because these risks evolve constantly, security solutions require ongoing updates and monitoring, driving recurring subscription demand. This creates sustained growth for internet software providers offering cybersecurity, fraud prevention and identity intelligence tools embedded directly into digital workflows.

 

• Given the colorful international politics and the resultant volatility in international markets, there is notable impact on the performance of each player. Companies increasingly prefer a subscription-based model, which improves revenue visibility and makes the business less lumpy. Innovation is very important, but not enough to drive growth. This model improves customer retention and allows providers to expand revenue through upgrades, pricing actions and usage growth over time.

Zacks Industry Rank Indicates Improving Prospects

The Zacks Internet – Software & Servicesindustry is housed within the broader Zacks Computer and Technologysector. It carries a Zacks Industry Rank #42, which places it in the top 17% of nearly 245 Zacks-classified industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates that the growth prospects are improving. 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 aggregate estimate revisions trend is telling. Estimates for fiscal year 2026 have averaged a decline of 8.5%, while those for 2027 have averaged a 16% decline over the past year. Estimates for both years have moved around quite a bit, with the greatest decline by far coming in September 2025, from where they have recovered significantly.

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 Lagging

The Zacks Internet – Software & Services Industry has historically traded at a premium to both the broader Zacks Computer and Technology Sector and the S&P 500, but performance has lagged in the past year. While it was more or less level with the others up to September, they turned sharply lower from then.

Overall, the industry returned 21.4% over the past year compared with the broader sector’s return of 49.4% and the S&P 500’s 33.9%.

One-Year Price Performance

Image Source: Zacks Investment Research

Industry's Valuation Is Attractive

On the basis of forward 12-month price-to-earnings (P/E) ratio, we see that the industry is currently trading at 20.45X, at a discount to its median level of 23.05X, a 0.9% discount to the S&P 500 and a 9.2% discount to the technology sector. Technology stocks usually trade at a higher multiple because investors pay a higher premium for innovation. Therefore, in this case, indications are that investors are being extremely cautious about them.

The industry has traded in the range of 20.11X to 29.76X over the past year, as the chart below shows.

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

Image Source: Zacks Investment Research

2 Stocks Worth Considering

Donnelley Financial Solutions (DFIN Quick QuoteDFIN - Free Report) : Lancaster, PA-based Donnelley is a U.S.-based financial technology and compliance software company that helps public companies, investment firms and capital market participants manage regulatory reporting and investor communications. Originally a financial-printing business spun off from R.R. Donnelley, DFIN is transforming into a cloud-software provider focused on automating complex disclosure, compliance and transaction workflows.

Around 58% of DFIN revenue still comes from its legacy businesses today, while 42% comes from SaaS/software. The goal is to keep growing the SaaS/software segment as digital demand continues to replace traditional.

Its platforms support companies through the entire lifecycle—from private fundraising and IPOs to ongoing public reporting and mergers. By replacing manual regulatory processes with secure, automated SaaS solutions, DFIN generates increasing recurring revenue while benefiting from rising global compliance requirements and capital-markets activity.

Its most Important Products (in order of importance) are:

• ActiveDisclosure — A cloud platform for creating and filing SEC and financial reports; core recurring revenue engine and highest customer stickiness.

• Venue — Virtual data room software used for IPOs and M&A due diligence; drives growth during strong deal markets.

• Arc Suite — Compliance and reporting platform for investment managers and funds; provides steady, regulation-driven subscription revenue.

• eBrevia — AI contract-analysis tool that automates legal document review; enhances deal workflows and future AI expansion potential.

Software revenue is growing double-digits and management expects a 60% software mix by 2028, shifting earnings toward recurring subs and leading to higher margins and more predictable cash flow. With government regulatory requirements increasing across the world, related spending can only move up as compliance is mandatory and switching vendors post-implementation is generally avoided.

Historically, deal activity (IPOs, M&A) have been cyclical and the company has seen upside on the up cycles. Therefore, under the current revenue model, software is adding stability and growth while transactions add legs to the growth. There is significant operating leverage, so margins should expand at a higher rate than revenue growth. Share buybacks provide liquidity to investors and accelerate EPS growth.

However, it’s worth noting that there are significant execution risks. Whether the company manages the transition to software is still up in the air considering that subscriber adds have slowed of late, the customer base consists of mainly smaller players and the market is highly competitive. At the same time, deal activity has a significant impact on the business, increasing earnings volatility.

The shares appear undervalued compared to the broader industry and also the S&P 500. Therefore, if execution meets the hype, there will be significant upside.

Shares of this Zacks Rank #1 (Strong Buy) company have gained 21.8% over the past year. The Zacks Consensus Estimate for 2026 is up 48 cents (11.6%) in the last 60 days. The 2027 earnings estimate was introduced during this period and has not changed since. Analysts expect sales to increase 2.5% this year with earnings growing 7.2%. Earnings are currently expected to grow 6.3% the following year on the back of 3.6% revenue growth.

Price and Consensus: DFIN

Image Source: Zacks Investment Research

 

Red Violet, Inc. (RDVT Quick QuoteRDVT - Free Report) : Headquartered in Boca Raton, Florida, Red Violet is a U.S.-based data analytics and identity intelligence company that provides cloud-native software solutions used for identity verification, fraud prevention, risk assessment and investigative analytics. The company aggregates public and proprietary data into a proprietary identity graph that helps organizations identify people, businesses and relationships in real time.

Its solutions are used across financial services, insurance, government and real estate industries to improve compliance, reduce fraud and support investigations. Red Violet generates primarily subscription and usage-based SaaS revenue, and focuses on scalable analytics powered by AI to enable safer digital transactions and data-driven decision-making.

Red Violet is a small-cap SaaS company gaining traction in AI-driven identity verification with consistent 20% revenue growth and improving profitability. Red Violet’s importance lies in its delivering AI-driven identity intelligence. The company is enhancing fraud detection and verification tools using advanced analytics and its proprietary identity graph.

Growing demand for automated risk and identity solutions, alongside broader AI, automation and cybersecurity investment themes, is helping drive positive sentiment toward the stock. Adoption of the FOREWARN platform remains another key driver. Expansion through real estate associations is increasing recurring subscriptions and widening the user base, helping create steady, predictable revenue growth.

Red Violet may struggle to sustain current growth rates if customer concentration, competitive pressure, or slowing adoption display limitations on its niche identity-analytics expansion story. Its biggest risk is customer concentration and dependence on a few core products, particularly the FOREWARN platform. A large portion of growth has come from adoption within the real estate industry, meaning a slowdown in housing activity or a reduction in associated spending could materially impact revenue growth.

At the same time, there’s no dearth of larger-well-capitalized competitors in the crowded identity verification and fraud analytics market, which makes price competition and customer switching constant threats. As market penetration increases, these risks will be amplified, making new verticals and larger enterprise customers a strategic imperative.

This is impacting the growth story around the stock. There are also some structural concerns. With a relatively small market capitalization and trading float, RDVT shares can move sharply on earnings surprises or sentiment shifts, making them more susceptible to downside risk during market stress.

The company announced very strong results in the last quarter, reporting record organic revenue growth and margin expansion. Consistent strong results indicate that its subscription-based SaaS model is scaling efficiently.

Shares of this Zacks Rank #2 (Buy) company have lost 0.1% over the past year, which is inconsistent with the strength in its recent results and growth potential. Red Violet’s earnings for the December quarter beat the Zacks Consensus Estimate by 40% and the preceding four quarter average surprise was 26.3%.

The Zacks Consensus Estimate for 2026 has increased 5 cents to $1.35 in the last 30 days while that for 2027 was introduced at $1.61. Analysts currently expect 2026 revenue and earnings to grow a respective 14.5% and 3.9%. Estimates for the following year are currently expected to grow 13.7% and 19.3% from there.

Price and Consensus: RDVT

Image Source: Zacks Investment Research