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Internet Software Industry Growth Prospects Bullish

Aniruddha Ganguly

The Zacks Internet software industry primarily comprises software infrastructure and application providers like F5 Networks (FFIV). Social media provider Twitter (TWTR) and online payments company Paypal (PYPL) 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 three major industry themes:

  • 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. However, increasing worldwide regulations related to data privacy, and data protection and accessibility do not bode well for the industry participants.


Zacks Industry Rank Indicates Solid Prospects

The Zacks Internet software industry, within the broader Zacks Computer And Technology sector, carries a Zacks Industry Rank #52 that places it in the top 21% 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 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.

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 rallied 9.4% over this period compared with the S&P 500 Index’s rise of 11.1% and the broader sector’s return of 12.1%.

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 6.59X compared with the S&P 500’s 3.31X and the sector’s trailing 12-month P/S of 3.76X.

Over the last five years, the industry has traded as high as 13.22X, as low as 3.65X and at the median of 6.80X, as the chart below shows.

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

 



Stocks to Watch Out For

Here we present four stocks that 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.

Santa Barbara CA-based AppFolio (APPF) offers cloud-based software solutions for property management and legal industries. The company sports a Zacks Rank #1.

Shares have rallied 60.3% on a year-to-date basis. The Zacks Consensus Estimate for 2019 earnings has increased by a couple of cents to 90 cents over the past 30 days.

Price and Consensus: APPF






San Ramon, CA-based Five9 (FIVN) provides cloud software to contact centers. This Zacks Rank #1 stock has returned 27.3% on a year-to-date basis.

The 2019 consensus earnings estimate remained at 71 cents over the past 30 days.

Price and Consensus: FIVN






Headquartered in Irvine, CA, analytics solution provider Alteryx (AYX) has returned 55.4% year to date. The 2019 consensus estimate for earnings stayed at 48 cents in the past 30 days.

Alteryx has a Zacks Rank #2.

Price and Consensus: AYX





Austin, TX-based Digital Turbine (APPS) provides products and solutions to mobile operators, device OEMs and third parties.

The fiscal 2020 consensus earnings estimate stayed at 20 cents over the past 30 days. This Zacks Rank #2 stock has returned a whopping 311% on a year-to-date basis.

Price and Consensus: APPS





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