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Zacks Industry Outlook Highlights: Criteo and Donnelley Financial

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For Immediate Release

Chicago, IL – July 19, 2021 – Today, Zacks Equity Research discusses Internet Software & Services, including Criteo S.A. (CRTO - Free Report) and Donnelley Financial Solutions, Inc. (DFIN - Free Report) .

Link: https://www.zacks.com/commentary/1762982/2-internet-software-services-stocks-worth-a-closer-look

The outlook for the Internet-Software & Services industry appears negative going by the estimate revision trend over the past year, driven largely by the pandemic. But there are a number of companies here that were in fact positively impacted by the pandemic and the rush-to-digitize trend that it gave rise to. The diversity of players in this group is the reason for this dissonance.

 
Being the backbone of the digital economy, it’s hard to see this industry doing badly over the long term. However, the near-term outlook is bleak. To make matters worse, the industry isn’t trading cheap. Under the circumstances, Criteo and Donnelley Financial Solutions are the only ones warranting a closer look.

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 and facilitating customer interaction and use of Internet based services.  

This industry includes mostly internet information providers like VeriSign Inc. (VRSN).

Three Themes Driving the Industry

·        The overall impact of COVID has been mixed 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 companies, while service providers, both work-related and otherwise, also moved to Internet-based channels. Another big segment that did humongous amounts of online business was retail. All of these moves were positive for the industry (in terms of revenue) and partially offset the negative impact of declining business at brick-and-mortar players. At least some of the positives will outlive the pandemic. In other cases, the return to physical operations will be gradual. But any improvement in the general level of economic 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 however involves infrastructure buildout, which increases costs for players. This causes great fluctuations in profitability as new infrastructure is depreciated and fresh debt is serviced. The pandemic exacerbated this situation leading to weak profitability in 2020. The bounce-back in March is mainly because of lower costs of operation.

·        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. The high penetration of mobile devices among users and the pandemic-driven necessity is driving more businesses to adopt technology that they earlier stayed away from because of the cost involved.

Zacks Industry Rank Indicates Uncertain Prospects

The Zacks Internet – Software & Services industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #224, which places it in the bottom 10% of more than 250 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 there are issues with the industry’s 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.

The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of the negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate estimate revisions, it appears that analyst confidence in the group’s earnings growth potential for 2021 has been on a more or less steady decline since last July.

Over the past year, the 2021 average earnings estimate is down 38.8%. The estimate for 2022 has been recovering since February but is still down 20.1% from last July.

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 Suffering

The past year’s performance of the Zacks Internet – Software & Services Industry shows that it has mostly lagged the broader Zacks Computer and Technology Sector, as well as the S&P 500. But after briefly peaking in February, it fell sharply and the gap with both groups has widened since.

Aggregate share price of the industry appreciated 18.6% over the past year compared to the broader sector’s increase of 45.5% and the S&P 500’s 37.4%.

Industry's Current Valuation

While many of the players are making losses at the moment, the industry as a whole continues to generate profits. So 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 a 59.1X multiple (close to its median value of 58.1X).

The S&P 500’s P/E is 22.1X (lower than its median value). It is also overvalued compared to the sector’s forward-12-month P/E of 28.1X.

The shares have traded in the annual range of 48.0X to 67.9X.

2 Stocks Worth a Closer Look

Donnelley Financial Solutions Inc.: Donnelley Financial provides software and services for content creation, management and distribution, as well as data analytics and multi-lingual localization services.

Strong capital markets, client adoption of new recurring software products, contribution from relatively new products like Arc Digital and the next-gen ActiveDisclosure platform, strong transaction activity, a favorable mix of software solutions are all contributing to the momentum in its business.

As a result, the Zacks Consensus Estimate for 2021 is up $1.54 (86.0%) in the past 60 days. The 2022 estimate is up $1.17 (49.0%). And shares of this Zacks Rank #1 company are up 280.7% over the past year.

Criteo S.A.: This provider of ad tech solutions has access to 20,000+ advertisers across 100 countries on the one side, and customer data relating to $2 billion worth of daily online sales and 4 billion product SKUs on the other.

The company is poised to gain from the massive push toward ecommerce in recent years. While the pandemic impacted advertiser budgets and limited spending, with a corresponding negative impact on the company’s results, it’s encouraging to note that business is coming back strongly and CRTO has also started seeing large multi-year deals. With the ecommerce opportunity expected to go from 16% of total sales today to 23% by 2023, Criteo, with its ability to provide marketing insights and yield gains, should see steady growth.

This Zacks Rank #2 (Buy) company is up 235.0% over the past year. The Zacks Consensus Estimate for the 2021 EPS increased 7 cents (3.2%) in the last 60 days. The estimate for 2022 increased 14 cents (6.6%).

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