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Drab Near-Term Prospects for Internet Software Industry

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The Zacks Internet software industry primarily comprises cloud-based infrastructure and application providers like F5 Networks (FFIV - Free Report) . Social media provider Twitter (TWTR - Free Report) and online payments company Paypal (PYPL - Free Report) are also notable companies in this industry.

The industry participants use SaaS-based cloud computing model to deliver solutions to end-users as well as enterprises.

Here are the four major industry themes:

  • Increasing worldwide regulations related to data privacy, and data protection and accessibility do not bode well for the industry participants. The implementation of General Data Protection Regulation, which took effect on May 25, 2018 in the EU, adds to the concerns. Moreover, California Consumer Privacy Act (CCPA), which restricts sales of user data among other things, is a headwind to industry participants. Further, lower ad-spending due to the coronavirus outbreak hinders sector growth.

 

  • The industry is benefiting from continued demand for digital transformation. Growth prospects are alluring primarily due to rapid adoption of SaaS, which offers a flexible and cost-effective delivery method of applications. It also cuts down on deployment time compared to legacy systems. SaaS attempts to deliver applications to any user, anywhere, anytime and on any device. It has been effective in addressing customer expectation of seamless communications across multiple channels, including voice, chat, email, web, social media and mobile. This drives customer satisfaction and increases retention rate, thereby driving the top line of industry participants.

 

  • The increasing customer-centric approach is allowing end-users to perform all the required actions while minimal intervention is needed from the software provider’s side. Moreover, the pay-as-you-go model helps Internet Software providers scale their offerings according to the needs of different users. Further, the subscription-based business model ensures recurring revenues for industry participants. The affordability of the SaaS delivery model, particularly for small and medium businesses, is also a major driver. The cloud-based applications are easy to use. Hence, the need for specialized training reduces significantly, which lowers expenses, thereby driving profits.

 

  • Additionally, the growing need to secure cloud platforms, amid growing incidence of cyber-attacks and hacking, drives demand for web-based cyber security software. Further, as enterprises continue to move their on-premise workload to cloud environments, application and infrastructure monitoring are gaining importance. This is creating more demand for web-based performance management monitoring tools.


Zacks Industry Rank Indicates Dull Prospects

The Zacks Internet software industry, within the broader Zacks Computer And Technology sector, carries a Zacks Industry Rank #157 that places it in the bottom 38% 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 dull 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 2 to 1.

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 Underperforms Sector and S&P 500

The Zacks Internet Software industry has underperformed the broader Zacks Computer And Technology sector as well as the S&P 500 Index in the past year.

The industry has increased 3.3% over this period compared with the S&P 500 Index’s gain of 6.3% and the broader sector’s rise of 13.1%.

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 7.33X compared with the S&P 500’s 3.23X and the sector’s trailing 12-month P/S of 4.04X.

Over the last five years, the industry has traded as high as 8.20X, as low as 6.28X and at the median of 7.37X, as the chart below shows.

Trailing 12-Month Price-to-Sales (P/S) Ratio

 




Stocks to Watch Out

Here we present three stocks that either carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

These stocks are well positioned to grow in the near term.

Los Angeles, CA-based The Rubicon Project (RUBI - Free Report) provides technology solutions to automate the purchase and sale of digital advertising inventory for buyers and sellers in the United States and internationally. The company sports a Zacks Rank #1.

Shares have rallied 76.6% in the past year. The Zacks Consensus Estimate for 2020 earnings has been revised 90% upward to 21 cents per share over the past 30 days.

Price and Consensus: RUBI

 


Headquartered in Irvine, CA, analytics solution provider Alteryx (AYX - Free Report) has returned 114.2% in a year’s time. The consensus estimate for 2020 earnings has moved 4.8% north to 87 cents per share in the past 30 days.

Alteryx has a Zacks Rank #2.

Price and Consensus: AYX

 


Illinois-based Paylocity Holding (PCTY - Free Report) offers cloud-based payroll and human capital management (HCM) software solutions to medium-sized organizations across the U.S.

The consensus mark for fiscal 2020 earnings has increased 5.1% to $1.84 per share over the past 30 days. This Zacks Rank #2 stock has returned 67.2% in the past year.

Price and Consensus: PCTY

 







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