3 Internet Software Stocks to Buy in a Prospering Industry
The Zacks Internet Software industry is suffering from increased geopolitical risks due to the Russia-Ukraine conflict, higher wage inflation, currency fluctuations and the pandemic-induced supply-chain disruptions. However, industry participants like Coupa Software COUP, Model N MODN and eGain EGAN are benefiting from accelerated demand for digital transformation and the ongoing shift to the cloud. The high demand for Software as a Service or SaaS-based solutions due to the increasing need for remote working, learning and diagnosis software, as well as cybersecurity applications, has been a major driver. The growing demand for solutions, which support hybrid operating environments, is noteworthy. Robust IT spending on software is another positive factor for the industry participants.
Industry Description
The Zacks Internet Software industry comprises companies offering application performance monitoring, as well as infrastructure and application software, DevOps deployment and Security software. Industry participants offer multi-cloud application security and delivery, social networking, online payment, and 3D printing applications and solutions. The industry participants use the SaaS-based cloud computing model to deliver solutions to end-users, as well as enterprises. Hence, subscription is the primary source of revenue. Advertising is also a major revenue source. Industry participants target a variety of end markets, including banking & financial services, service providers, federal governments, and animal-health technology and services.
3 Trends Shaping the Future of the Internet Software Industry
Growing Adoption of SaaS: The industry is benefiting from the continued demand for digital transformation. Growth prospects are alluring primarily due to the rapid adoption of SaaS, which offers a flexible and cost-effective delivery method of applications. It also cuts down on deployment time compared with legacy systems. SaaS attempts to deliver applications to any user, anywhere, anytime and on any device. It has been effective in addressing customer expectations of seamless communications across multiple channels, including voice, chat, email, web, social media and mobile. This drives customer satisfaction and increases the retention rate, driving the top lines of the industry participants. Moreover, the SaaS delivery model has supported the industry participants to deliver software applications amid the coronavirus-led lockdowns and shelter-in-place guidance. Remote working, learning and diagnosis have also boosted the demand for SaaS-based software applications.
Pay-As-You-Go Model Gaining Traction: The increasing customer-centric approach is allowing end-users to perform all the required actions with minimal intervention by the software providers. The pay-as-you-go model helps Internet Software providers scale their offerings according to the needs of different users. The subscription-based business model ensures recurring revenues for the industry participants. The affordability of the SaaS delivery model, particularly for small and medium-sized businesses, is another major driver. The cloud-based applications are easy to use. Hence, the need for specialized training reduces significantly, which lowers expenses, thereby driving profits.
Ongoing Transition to Cloud Creating Opportunities: Additionally, the growing need to secure cloud platforms amid the growing incidences of cyber-attacks and hacking drives the demand for web-based cyber security software. Further, as enterprises continue to move their on-premise workload to cloud environments, application and infrastructure monitoring is gaining importance. This is increasing the demand for web-based performance management monitoring tools.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Internet Software industry, within the broader Zacks Computer And Technology sector, carries a Zacks Industry Rank #64 that places it in the top 25% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates bright 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.
But before we present the top industry picks, it is worth looking at the industry’s shareholder returns and current valuation first.
Industry Lags 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 declined 60.2% over this period compared with the S&P 500 Index’s dip of 17.9% and the broader sector’s slip of 32.1%.
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 2.22X compared with the S&P 500’s 3.93X and the sector’s trailing 12-month P/S of 3.82X.
Over the last three years, the industry has traded as high as 5.25X, as low as 1.78X and at the median of 2.79X, as the chart below shows.
Trailing 12-Month Price-to-Sales (P/S) Ratio
3 Stocks to Buy Right Now
eGain - This Zacks Rank #1 (Strong Buy) company, based in Sunnyvale, CA, automates customer engagement with an innovative SaaS platform powered by Artificial Intelligence and knowledge capabilities. You can see the complete list of today’s Zacks #1 Rank stocks here.
eGain’s expanding clientele is a key catalyst. The company sells mostly to large enterprises across financial services, telecommunications, retail, government, healthcare and utilities.
eGain’s stock price has decreased 11.1% year to date. The Zacks Consensus Estimate for the company’s fiscal 2023 earnings is pegged at 19 cents per share, up 35.7% in the past 30 days.
Price and Consensus: EGAN
Coupa Software - This Zacks Rank #2 (Buy) company is benefiting from the robust adoption of Coupa Pay offerings and cloud-based Business Spend Management solutions. Continued momentum in Coupa Advantage Express, Strategic Sourcing, Risk Assess and Source Together solutions is likely to bolster the company’s subscription services’ revenues in the long run.
This San Mateo, CA-based company’s shares have declined 71% year to date. The Zacks Consensus Estimate for Coupa Software’s fiscal 2023 earnings has been unchanged at 44 cents per share over the past 30 days.
Price and Consensus: COUP
Model N - This San Mateo, CA-based company is experiencing a successful transition to a SAAS platform as part of its transformation to a cloud company. Solid go-to-market strategy, logo additions and robust sales execution are driving its top-line growth.
Shares of this Zacks Rank #2 company have returned 29.3% year to date. The Zacks Consensus Estimate for Model N’s fiscal 2023 earnings is pegged at 86 cents per share, up 21.1% in the past 30 days.
Price and Consensus: MODN
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Coupa Software, Inc. (COUP) : Free Stock Analysis Report
eGain Corporation (EGAN) : Free Stock Analysis Report
Model N, Inc. (MODN) : Free Stock Analysis Report
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