3 Internet Software to Buy in a Booming Industry – November 21, 2022


Zacks The Internet Software industry suffers from increased geopolitical risks due to the Russia-Ukraine conflict, high wage inflation, currency fluctuations and supply chain disruptions caused by the pandemic. However, industry participants like it Coupa software (A FIGHT Free Report), Model N (MODN Free Report) and eGain (EGAN Free Report) benefits from the growing demand for digital transformation and the ongoing shift to the cloud. High demand for Software as a Service or SaaS-based solutions has been a major driver due to the growing need for remote working, learning and diagnostic applications as well as cyber security applications. The growing demand for solutions that support hybrid operating environments attracts attention. Strong IT spending on software is another positive factor for industry players.

Industry description

The Zacks Internet Software industry consists of companies that offer software performance monitoring as well as infrastructure and software, DevOps deployment, and Security software. Industry players offer many cloud application security and delivery, social networking, online payment and 3D printing applications and solutions. Industry players are using the SaaS-based cloud computing model to provide solutions to end users as well as enterprises. So subscription is the main source of income. Advertising is also the main source of income. 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

Growing adoption of SaaS: Industry benefits from continued demand for digital transformation. Growth prospects are attractive primarily due to the rapid adoption of SaaS, which offers a flexible and cost-effective application delivery method. It also reduces deployment time compared to legacy systems. SaaS seeks 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 increases customer satisfaction and increases retention rate, increasing the top ranks of industry participants. Moreover, the SaaS delivery model has supported industry players to deliver software applications amid coronavirus-induced lockdowns and shelter-in-place instructions. Remote working, learning and diagnostics have also increased the demand for SaaS-based software applications.

Increasingly, the Pay Model is gaining traction: An increasingly customer-centric approach allows end users to perform all required actions with minimal intervention from software developers. The pay-as-you-go model helps Internet Software providers expand their offerings to meet the needs of different users. A subscription-based business model provides recurring revenue for industry participants. The affordability of the SaaS delivery model is another key driver, especially for small and medium-sized businesses. Cloud-based applications are easy to use. Thus, the need for special training is significantly reduced, which reduces costs and thus profits.

Continued Transition to Cloud Creation Capabilities: In addition, growing need for cloud platform security in the wake of rising cyber attacks and hacking incidents is driving the demand for web-based cyber security software. In addition, as enterprises continue to migrate on-premises workloads to cloud environments, application and infrastructure monitoring is gaining importance. This increases the demand for web-based performance management monitoring tools.

The Zacks Industry Rank shows bright prospects

Within the broader Zacks Computer & Technology sector, the Zacks Internet Software industry carries a Zacks Industry Rank of #64, placing it in the top 25% of over 250 Zacks industries.

The Zacks Industry Rank, which is the average of the Zacks Rank of all member stocks in the group, indicates a bright near-term outlook. Our research shows that the top 50% of Zacks Rank industries outperform the bottom 50% by 2-to-1.

But before presenting the best industry picks, it’s worth first looking at the industry’s shareholder returns and current valuation.

Industrial Lagging Sector and the S&P 500

The Zacks Internet Software industry underperformed the broader Zacks Computer & Technology sector as well as the S&P 500 Index last year.

The industry fell 60.2% over the period, compared with a 17.9% decline for the S&P 500 Index and a 32.1% decline for the broader sector.

One Year Price Performance

Current Assessment of the Industry

Based on the 12-month price-to-sales (P/S), which is commonly used to value Internet Software stocks, we see that the industry is currently trading at 3.93X and 2.22X the S&P 500’s. the sector’s trailing 12-month P/S is 3.82X.

As shown in the chart below, the industry has traded at a median of 5.25X, a low of 1.78X, and a median of 2.79X over the past three years.

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

3 stocks to buy now

eGain – Based in Sunnyvale, CA, this Zacks Rank #1 (Strong Buy) company automates customer engagement with an innovative SaaS platform powered by AI and knowledge capabilities. You can see Here’s a full list of today’s Zacks #1 Rank stocks.

eGain’s expanding clientele is a key catalyst. The company sells primarily to large enterprises in financial services, telecommunications, retail, government, healthcare and utilities.

eGain’s stock price is down 11.1% year to date. The Zacks Consensus Estimate for the company’s fiscal 2023 earnings is set at 19 cents per share, up 35.7% over the past 30 days.

Price and Consensus: EGAN

Coupa software – This Zacks Rank #2 (Buy) company benefits from a solid implementation of Coupa Pay offerings and cloud-based Business Expense Management solutions. Continued momentum in Coupa Advantage Express, Strategic Sourcing, Risk Assess and Source Together solutions will drive the company’s subscription services revenues over the long term.

Shares of this San Mateo, CA-based company are down 71% year to date. Zacks Consensus Estimate for Coupa The software company’s fiscal 2023 earnings were unchanged over the past 30 days at 44 cents per share.

Price and Consensus: SHOCK

Model N – This San Mateo, CA-based company is experiencing a successful transition to a SAAS platform as part of its transformation into a cloud company. A solid go-to-market strategy, logo additions and strong sales execution are driving its top-line growth.

Shares of this Zacks Rank #2 company have returned 29.3% year to date. The Zacks Consensus Estimate for Model N’s fiscal 2023 earnings is 86 cents per share, up 21.1% over the past 30 days.

Price and Consensus: MODN



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