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Internet-Software & Services Outlook: Price Correction Drives Opportunities

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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 #28, which places it at the top 11% 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 down 28.6%.

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 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 as well as the S&P 500 index.

The industry has appreciated 2.2% over this period compared to the S&P 500 index’s decline of -0.8% and broader sector’s decline of -5.6%.

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 38.4X compared to the S&P 500’s 16.0X. It is also overvalued compared to the sector’s forward-12-month P/E of 18.3X.

In fact, the industry is currently trading at the upper end of its annual range of 41.93X to 28.14X and therefore, also above the median of 33.16X, 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, especially given the recent market correction. So here are some of our picks with a Zacks Rank #1 (Strong Buy).  

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

58.com Inc. (WUBA - Free Report) : Shares of this Chinese online marketplace provider are down 32.0% from the year-ago level. Its 2019 Zacks Consensus EPS Estimate has jumped 18.4% in the last 7 days.

Price and Consensus: WUBA

 

Adesto Technologies Corporation (IOTS - Free Report) : This leading provider of application-specific non-volatile memory products has seen an18.6% erosion in its share price over the past year although prices have been on an upward trajectory since October last year. In the last 30 days, its 2019 Zacks Consensus EPS Estimate moved up 4 cents to -$0.02 while the 2020 EPS moved up 61.5% to 21 cents.

Price and Consensus: IOTS

 

Criteo S.A. (CRTO - Free Report) : This performance display advertising solutions provider saw its share price drop 28.7% in the past year. Its current Zacks Consensus EPS Estimate for 2019 is stable in the last 30 days.

Price and Consensus: CRTO

 

NetEase, Inc. (NTES - Free Report) : This Chinese provider of an online gaming platform, applications and services saw its share price drop 28.7% in the past year. Its current Zacks Consensus EPS Estimate for 2019 is up 2.8% while the 2020 EPS is up 3.1% in the last 30 days.

Price and Consensus: NTES

 

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58.com Inc. (WUBA) - free report >>

NetEase, Inc. (NTES) - free report >>

Adesto Technologies Corporation (IOTS) - free report >>

Criteo S.A. (CRTO) - free report >>