zacks internet software The industry is experiencing increased geopolitical risks due to the conflict between Russia and Ukraine, rising wage inflation, currency fluctuations, and supply chain disruptions caused by the pandemic. However, industry participants love Copa software (coup – free report), N model (MODN – free report) f eGain (Egan – Free Report) Capitalizes on the accelerating 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 growing need for remote working, learning and diagnostic software, as well as cyber security applications, has been a major driver. The growing demand for solutions that support mixed operating environments is noteworthy. Strong IT spending on software is another positive factor for industry participants.
Zacks’ Internet software industry consists of companies that provide application performance monitoring, as well as infrastructure and application software, DevOps deployment, and security software. Industry participants offer multiple cloud application security and delivery, social networking, online payment, and 3D printing applications and solutions. Industry participants are using 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 source of revenue. Industry participants target a variety of end markets, including banking and financial services, service providers, federal governments, and animal health technology and services.
3 trends shaping the future of the internet software industry
SaaS adoption is growing: The industry is benefiting from the continuous demand for digital transformation. Growth prospects are enticing primarily due to the rapid adoption of software as a service, which provides a flexible and cost-effective delivery method for applications. It also reduces deployment time compared to legacy systems. SaaS tries to deliver applications to any user, anywhere, anytime, on any device. They have been effective in meeting customers’ expectations of seamless communications across multiple channels, including voice, chat, email, web, social media, and mobile. This results in satisfied customers and an increase in the retention rate, which leads to the emergence of the upper ranks of the participants in the industry. Furthermore, the SaaS delivery model has supported industry participants to deliver software applications amid coronavirus-led lockdowns and shelter-in-place guidelines. Remote working, learning, and diagnostics have also increased the demand for SaaS-based software applications.
The pay-as-you-go model is gaining tractionAn increasingly client-centric approach allows end users to perform all required actions with minimal intervention by software providers. The pay-as-you-go model helps Internet software providers expand their offering according to the needs of different users. The subscription-based business model ensures recurring revenue for industry participants. The affordability of the SaaS delivery model, especially for small and medium-sized businesses, is another key driver. Cloud-based applications are easy to use. Thus, the need for specialized training is greatly reduced, which reduces expenses and, in turn, leads to increased profits.
Continuous transition to creating cloud opportunitiesIn addition, the growing need to secure cloud platforms amid increasing cases of cyberattacks and hacking is driving the demand for web-based cybersecurity software. Furthermore, as organizations continue to move their on-premises workloads to cloud environments, monitoring of applications and infrastructure gains importance. This increases the demand for web-based performance management monitoring tools.
Zacks Industry Ranking points to bright prospects
Zacks Internet software industry, within the broader scope of Zacks Computer and technology The sector is ranked Zacks Industry #64 which puts it in the top 25% of more than 250 Zacks industries.
groups Zacks Industry Rank, which is the average Zacks rating for all member stocks, points to bright prospects in the near term. Our research shows that the top 50% of Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
But before we present our top industry picks, it’s worth looking at industry shareholder returns and current valuation first.
Industry lagging sector and the 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, last year.
The industry is down 60.2% over the period compared to a 17.9% drop in the S&P 500 and a 32.1% slide in the broader sector.
Price performance for a year
Industry current assessment
On the basis of tracking 12-month price-to-sales (P/S), a commonly used multiple for evaluating internet software stocks, we see the industry currently trading at 2.22x the S&P 500’s 3.93X and the sector’s 12-month trailing EPS of 3.82. Once.
Over the past three years, the industry has been trading up 5.25X, and 1.78X with an average of 2.79X, as the chart below shows.
12-month price-to-sales ratio (P/S)
3 stocks to buy now
eGain Zacks Rank #1 (Strong Buy), based in Sunnyvale, CA, automates customer engagement through an innovative SaaS platform powered by AI and knowledge capabilities.
Expanding eGain customers is a major motivating factor. The company sells mostly to large corporations across financial services, telecom, retail, government, healthcare and utilities.
eGain share price is down 11.1% year-to-date. The Zacks Consensus estimate for the company’s 2023 fiscal earnings pegged at 19 cents per share, up 35.7% in the past 30 days.
Price and consensus: EGAN
Copa software – Zacks #2 (buy) company benefits from strong adoption of Coupa Pay offerings and cloud-based business expense management solutions. Continued momentum in Coupa Advantage Express solutions, strategic sourcing, risk assessment and provenance together is likely to boost the company’s subscription services revenue in the long term.
Shares of the San Mateo, California-based company are down 71% since the start of the year. Zaks consensus rating for the Coupa The program’s 2023 fiscal earnings remained unchanged at 44 cents per share over the past 30 days.
Price and consensus: COUP
N model – This San Mateo, California-based company is experiencing a successful transition to the SAAS platform as part of its transformation into a cloud company. An aggressive market entry strategy, logo additions and aggressive sales execution are driving its top-tier growth.
Shares of Zacks No. 2 have returned 29.3% year-to-date. The Zacks consensus estimate for fiscal model earnings for 2023 was pegged at 86 cents per share, up 21.1% in the past 30 days.
Price and consensus: MODN