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 three major themes in the industry:
- The overall impact of COVID has been positive for the industry. Although it necessitated work from home for employees, the industry, being by nature tech-centric, had relatively fewer issues with this. On the other hand, business continuity concerns accelerated the shift to cloud-based working for many, while service providers, both work-related and otherwise, also moved to Internet-based channels. Another big segment that did humongous amounts of business online was retail. All of these moves were positive for the industry and offset any negative impact of declining business at brick-and-mortar players. At least some of these trends will outlive the pandemic. In other cases, the return to physical operations will be gradual. But any improvement in the general level of industrial growth will also improve prospects for the industry.
- The higher volume of business being operated through the cloud and the increasing demand for enabling software and services are however increasing costs for players as they continue to expand their offerings in the race to grab more business. This causes great fluctuations in profitability as more debt is incurred and physical infrastructure built out. However, one positive in this context is the net cash per share, which is showing an upward trend over the past three years. Profitability is likely to suffer again this year as the very strong demand will require infrastructure buildout.
- 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 #41, which places it at the top 16% of more than 250 Zacks industries. It includes players like VeriSign (VRSN - Free Report) .
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 analyst confidence in the group’s earnings growth potential for 2021 has improved in the last three months while 2020 expectations are down. Overall, the 2020 average earnings estimate is down 22.2%. The estimate for 2021 is up 12.2%.
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 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 as well as the S&P 500 index.
Aggregate share price of the industry appreciated 26.2% over this period compared to the S&P 500 index’s gain of 5.2% and broader sector’s increase of 21.6%.
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 45.7X (close to its 52-week high) compared to the S&P 500’s 22.2X. It is also overvalued compared to the sector’s forward-12-month P/E 25.3X.
The shares have traded in the annual range of 31.8X to 46.0X, as the chart below shows.
Forward 12 Month Price-to-Earnings (P/E) Ratio
The Zacks Internet – Software & Services market should continue to see secular revenue growth because the underlying drivers are strong. However, profitability will take time to stabilize. So it’s mainly recommended for long-term investors.
Buy ranked stocks aren’t hard to find in the Zacks Internet – Software & Services market. So here are some of our picks with a Zacks Rank #1 (Strong Buy).
ChannelAdvisor Corp. (ECOM - Free Report) : This provider of cloud-based e-commerce solutions and services saw its share price appreciate 61.9% in the past year. Its current Zacks Consensus EPS Estimate for 2020 is up 20 cents (40.8%) in the last 90 days.
Price and Consensus: ECOM
Donnelly Financial Solutions (DFIN - Free Report) : This Chicago-based provider of software and services for content creation, management and distribution, as well as data analytics and multi-lingual localization saw its share price drop 37.8% in the past year. Its current Zacks Consensus EPS Estimate for 2020 is up 38 cents (30.4%) in the last 90 days.
Price and Consensus: DFIN
VeriSign, Inc. (VRSN - Free Report) : This provider of Internet infrastructure services including domain name registry and infrastructure assurance, saw its share price drop 1.9% in the past year. Its 2020 Zacks Consensus EPS Estimate is up $1.23 (22.8%) in the last 90 days.
Price and Consensus: VRSN
These Stocks Are Poised to Soar Past the Pandemic
The COVID-19 outbreak has shifted consumer behavior dramatically, and a handful of high-tech companies have stepped up to keep America running. Right now, investors in these companies have a shot at serious profits. For example, Zoom jumped 108.5% in less than 4 months while most other stocks were sinking.
Our research shows that 5 cutting-edge stocks could skyrocket from the exponential increase in demand for “stay at home” technologies. This could be one of the biggest buying opportunities of this decade, especially for those who get in early.
See the 5 high-tech stocks now>>