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Internet-Software & Services Outlook: Ripe for the Picking

Sejuti Banerjea

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 #29, which places it at the top 11% 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 on the group’s earnings growth potential is wavering, although there’s some improvement in the last few months. In the past year, the industry’s earnings estimate for the current year is down 5.6%.

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 19.7% over this period compared to the S&P 500 index’s gain of 7.1% and broader sector’s increase of 8.2%.

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 32.8X compared to the S&P 500’s 17.0X. It is also overvalued compared to the sector’s forward-12-month P/E of 20.2X.

In fact, the industry is currently trading at the upper end of its annual range of 40.2X to 27.0X but below the median value of 35.8X, 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).  

You can see the complete list of today’s Zacks #1 Rank stocks here.

Globant S.A. (GLOB): Shares of this Luxembourg-based provider of engineering, design and innovation services are up 96.7% from the year-ago level. Its 2019 Zacks Consensus EPS Estimate is up 2.7% in the last 90 days.

Price and Consensus: GLOB

 

NetEase, Inc. (NTES): This Chinese provider of an online gaming platform, applications and services saw its share price appreciate 23.3% in the past year. Its current Zacks Consensus EPS Estimate for 2019 is up 35.9% while the 2020 EPS is up 18.9% in the last 90 days.

Price and Consensus: NTES

 

Vonage Holdings Corp. (VG): The fastest-growing telephony company in North America saw its share price drop 19.5% in the past year. Its current Zacks Consensus EPS Estimate for 2019 is up 40% in the last 90 days.

Price and Consensus: VG

 

Boingo Wireless, Inc. (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 69.9% in the past year. Its 2019 Zacks Consensus loss per share Estimate is down 21% in the last 90 days.

Price and Consensus: WIFI

 

Ringcentral, Inc. (RNG): This business communications solutions provider saw its share price jump 116.4% in the past year. Its current Zacks Consensus EPS Estimate for 2019 is up 6.8% in the last 90 days.

Price and Consensus: RNG

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Boingo Wireless, Inc. (WIFI) : Free Stock Analysis Report
 
VeriSign, Inc. (VRSN) : Free Stock Analysis Report
 
Vonage Holdings Corp. (VG) : Free Stock Analysis Report
 
Ringcentral, Inc. (RNG) : Free Stock Analysis Report
 
NetEase, Inc. (NTES) : Free Stock Analysis Report
 
Globant S.A. (GLOB) : Free Stock Analysis Report
 
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