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Internet - Software & Services Outlook: Opportunities Exist

Sejuti Banerjea
·5 mins read

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 the three major themes in the industry:

  • As businesses increasingly move their operations to the cloud, the demand for enabling software and services will continue to increase. This means high costs for players as they continue to expand their offerings in the race to grab more business. As a result, most players continue to make little to no profit despite strong revenue growth. 

  • It follows that the general level of industrial growth and progress also impacts the amount of business transacted online.

  • 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 #44, which places it at the top 17% of more than 250 Zacks industries. It includes players like VeriSign (VRSN).

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 is wavering. While estimates have held steady since October, there was a drop in February, which took the industry’s 2020 average earnings estimate revision down to 2.2%. The estimate for 2019 is up 18.6%.

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 33.5% over this period compared to the S&P 500 index’s gain of 20.5% and broader sector’s increase of 28.9%.

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 36.4X compared to the S&P 500’s 19.4X. It is also overvalued compared to the sector’s forward-12-month P/E 23.3X.

In fact, the industry is currently trading at its median value of 36.4X. The shares have traded in the annual range of 40.2X to 31.9X, as the chart below shows.

Forward 12 Month Price-to-Earnings (P/E) Ratio




Bottom Line

The Zacks Internet – Software & Services market should continue to see secular revenue growth because the underlying drivers are strong. However, profitability will take time. 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) or #2 (Buy).  


NetEase, Inc. (NTES): This Chinese provider of an online gaming platform, applications and services saw its share price appreciate 59.8% in the past year. Its current Zacks Consensus EPS Estimate for 2020 is up 109 cents (7.6%) in the last 90 days.

Price and Consensus: NTES



Boingo Wireless (WIFI): This provider of WiFi software and services via Boingo Network locations in airports, hotel chains, cafés and coffee shops, restaurants, convention centers and metropolitan hot zones saw its share price sink 40.2% from the year-ago level. Its current Zacks Consensus loss per share estimate for 2020 is down 7 cents in the last 90 days.    

Price and Consensus: WIFI




Donnelly Financial Solutions (DFIN): 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 38.2% in the past year. Its current Zacks Consensus EPS Estimate for 2020 is unchanged in the last 90 days.

Price and Consensus: DFIN



Endurance International Group Holdings, Inc. (EIGI): This provider of cloud-based products and services including scalable and on-demand computing, security, storage and bandwidth, online marketing, mobile, and productivity solutions, saw its share price sink 30.0% in the past year. Its 2020 Zacks Consensus EPS Estimate is up 7 cents (140%) in the last 90 days.

Price and Consensus: EIGI




 
More Stock News: This Is Bigger than the iPhone!

It could become the mother of all technological revolutions. Apple sold a mere 1 billion iPhones in 10 years but a new breakthrough is expected to generate more than 27 billion devices in just 3 years, creating a $1.7 trillion market.

Zacks has just released a Special Report that spotlights this fast-emerging phenomenon and 6 tickers for taking advantage of it. If you don't buy now, you may kick yourself in 2020.  

Click here for the 6 trades >>


Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
Boingo Wireless, Inc. (WIFI) : Free Stock Analysis Report
 
VeriSign, Inc. (VRSN) : Free Stock Analysis Report
 
NetEase, Inc. (NTES) : Free Stock Analysis Report
 
Endurance International Group Holdings, Inc. (EIGI) : Free Stock Analysis Report
 
Donnelley Financial Solutions Inc. (DFIN) : Free Stock Analysis Report
 
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