Internet software industry Zacks is suffering from heightened geopolitical risks due to the Russian-Ukrainian conflict, rising wage inflation, currency fluctuations and pandemic-induced supply chain disruptions. However, industry participants like Coupa Software (CUT – free report), Model N (MODERN – free report) and eGain (EGAN – Free Report) benefit from the accelerated demand for digital transformation and the ongoing transition to the cloud. Strong demand for software as a service or SaaS solutions due to the growing need for remote working, learning and diagnostic software, as well as cybersecurity applications, has been a major driver. The growing demand for solutions that support hybrid operating environments is remarkable. Another positive factor for industry players is robust IT spending on software.
Description of the industry
The Zacks internet software industry includes companies offering application performance monitoring, as well as infrastructure and application software, DevOps deployment, and security software. Industry participants offer applications and solutions for multi-cloud application security and delivery, social media, online payment and 3D printing. Industry participants are using the SaaS-based cloud computing model to deliver solutions to end users, as well as enterprises. Therefore, the subscription is the main source of income. 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 technologies 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 attractive primarily due to the rapid adoption of SaaS, which offers a flexible and cost-effective method of delivering applications. It also reduces 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 meeting customer expectations for seamless communications across multiple channels including voice, chat, email, web, social media and mobile. This boosts customer satisfaction and increases the retention rate, which drives top lines from industry participants. Additionally, the SaaS delivery model has helped industry participants deliver software applications amid coronavirus-related lockdowns and shelter-in-place guidance. Remote work, learning and diagnostics have also driven demand for software applications in SaaS mode.
The Pay-As-You-Go model is gaining ground: The increasingly customer-centric approach allows end users to perform all required actions with minimal intervention from software vendors. The pay-as-you-go model helps Internet software providers tailor their offerings to the needs of different users. The subscription-based business model guarantees recurring revenue for industry players. The affordability of the SaaS delivery model, especially for small and medium-sized businesses, is another major factor. Cloud-based applications are easy to use. Consequently, the need for specialized training decreases considerably, which reduces expenses and thus generates profits.
Continuous transition to the cloud creating opportunities: Furthermore, the growing need to secure cloud platforms amid growing incidence of cyberattacks and hacking is driving the demand for web-based cybersecurity software. Additionally, as enterprises continue to shift their on-premises workload to cloud environments, application and infrastructure monitoring becomes increasingly important. This increases the demand for web-based performance management monitoring tools.
Zacks’ Industry Rankings Indicate Bright Prospects
The Zacks Internet Software Industry, within the broader Zacks IT and Technology sector, carries a Zacks Industry Ranking of #64 which places it in the top 25% of over 250 Zacks industries.
The group’s Zacks Industry Rank, which is the average Zacks Rank of all member stocks, indicates a bright near-term outlook. Our research shows that the top 50% of industries ranked by Zacks outperform the bottom 50% by a factor of more than 2 to 1.
But before outlining the industry’s top picks, it’s worth first looking at industry shareholder returns and current valuation.
The industry is lagging the sector and the S&P 500
The Zacks internet software industry has underperformed the broader Zacks IT and Technology sector, as well as the S&P 500 Index, over the past year.
The industry fell 60.2% over the period, compared with the S&P 500 index’s 17.9% decline and the broader sector’s 32.1% decline.
Year-over-year price performance
Current industry assessment
Based on the 12-month price-to-sales (P/S) ratio, which is a multiple commonly used to value internet software stocks, we see that the industry is currently trading at 2.22X versus 3.93X. of the S&P 500 and the sector’s 12-month P/S of 3.82X.
Over the past three years, the industry has traded as low as 5.25X, as low as 1.78X and at the median of 2.79X, as seen in the chart below.
Rolling 12-month price-to-sales (P/S) ratio
3 stocks to buy now
eGain – This Sunnyvale, CA-based Zacks #1 (Strong Buy) company automates customer engagement with an innovative SaaS platform powered by artificial intelligence and insights capabilities.
eGain’s growing customer base is a key enabler. The company primarily sells to large corporations in financial services, telecommunications, retail, government, healthcare and utilities.
eGain’s stock price is down 11.1% since the start of the year. Zacks’ consensus estimate for the company’s fiscal 2023 earnings is pegged at 19 cents per share, up 35.7% over the past 30 days.
Pricing and Consensus: EGAN
Coupa Software – This Zacks #2 (buy) company is benefiting from robust adoption of Coupa Pay offerings and cloud-based enterprise expense management solutions. Continued momentum from Coupa Advantage Express, Strategic Sourcing, Risk Assess and Source Together solutions should strengthen the company’s subscription services revenue over the long term.
Shares of the San Mateo, Calif.-based company are down 71% year-to-date. Zacks consensus estimate for Coupa Software’s fiscal 2023 earnings were flat at 44 cents per share over the past 30 days.
Price and Consensus: COUP
Model N – This San Mateo, Calif.-based company is experiencing a successful transition to a SAAS platform as part of its transformation into a cloud enterprise. A solid go-to-market strategy, logo additions, and strong sales execution are driving its revenue growth.
Shares of this No. 2 Zacks Rank company have returned 29.3% year-to-date. The Zacks consensus estimate for Model N fiscal year 2023 earnings is pegged at 86 cents per share, up 21.1% over the past 30 days.
Pricing and Consensus: MODN
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