The Zacks Internet software the industry suffers from increased geopolitical risks due to the Russia-Ukraine conflict, rising wage inflation, currency fluctuations and pandemic-induced supply chain disruptions. However, industry participants like it Coupe software (STROKE STROKE – free report), Model no (MODERN – Free Report) e eGain (EGAN – Free Report) are benefiting from accelerating demand for digital transformation and the continued move to the cloud. The high demand for software as a service or SaaS-based solutions due to the growing need for software for remote work, learning and diagnosis as well as cybersecurity applications has been a driving factor. Noteworthy is the growing demand for solutions that support hybrid operating environments. Robust IT spending on software is another positive factor for industry participants.
Zacks’ Internet software business includes companies that offer application performance monitoring, as well as infrastructure and application software, DevOps deployment, and security software. Industry participants offer security and delivery of multi-cloud applications, social networking, online payments, and 3D printing applications and solutions. Industry participants are using the SaaS-based cloud computing model to deliver solutions to end users and 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 technology and services.
3 trends shaping the future of the internet software industry
Growing adoption of SaaS: The industry is benefiting 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 method of application delivery. It also reduces implementation time compared to legacy systems. SaaS attempts to deliver applications to any user, anywhere, anytime, on any device. It has been effective in meeting customer expectations of seamless communications across multiple channels, including voice, chat, email, web, social media and mobile. This increases customer satisfaction and increases retention rate, driving the top lines of industry participants. Additionally, the SaaS delivery model has supported industry participants to deliver software applications amid coronavirus-driven lockdowns and shelter guidance. Remote working, learning and diagnostics have also increased the demand for SaaS-based software applications.
The pay-as-you-go model is gaining traction: Growing 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 vendors scale their offerings based on the needs of different users. The subscription-based business model ensures recurring revenue for industry participants. The accessibility of the SaaS delivery model, especially for small and medium-sized businesses, is another driving factor. Cloud-based applications are easy to use. Thus, the need for specialized training is significantly reduced, which reduces expenses, thus driving profits.
Ongoing transition to cloud creating opportunityAdditionally, the growing need to secure cloud platforms amid the growing incidence of cyberattacks and hacking drives the demand for web-based cybersecurity software. Additionally, as businesses continue to move their on-premises workload to cloud environments, monitoring applications and infrastructure is gaining in importance. This is increasing the demand for web-based performance management monitoring tools.
Zacks’ industry grade indicates bright prospects
The Zacks Internet Software Industry, within the greater Zacks Computers and technology industry, carries a Zacks Industry Rank #64 which places it in the top 25% of more than 250 Zacks industries.
Of the group Zacks Industry Ranking, which is the average Zacks Rank of all member stocks, indicates bright near-term prospects. Our research shows that the top 50% of industries Zacks ranked outnumber the bottom 50% by a factor of more than 2 to 1.
But before we present the industry’s top picks, it’s worth looking first at the industry’s shareholder returns and current valuation.
Sector lags industry and S&P 500
Zacks’ Internet software industry has underperformed the broader Zacks computer and technology sector, as well as the S&P 500 index, over the past year.
The sector declined 60.2% during this period compared to a 17.9% decline in the S&P 500 index and a 32.1% decline in the broader sector.
Price performance over one year
Current industry rating
Based on the 12-month selling price (P/S), which is a multiple commonly used to value Internet software stocks, we see that the sector is currently trading at 2.22 times compared to the S&P 500’s 3.93 times and the industry’s trailing 12-month P/S of 3.82X.
Over the past three years, the sector has traded as high as 5.25x, as high as 1.78x and the median as high as 2.79x, as the chart below shows.
Price/sales (P/S) ratio for the last 12 months
3 shares to buy right now
eGain – This Zacks Rank #1 (Strong Buy) company, based in Sunnyvale, CA, automates customer engagement with an innovative SaaS platform powered by AI and insight capabilities.
eGain’s growing customer base is a key catalyst. The company sells primarily to large enterprises through financial services, telecommunications, retail, government, healthcare, and utilities.
eGain’s share price is down 11.1% year-to-date. Zacks’ consensus estimate for the company’s fiscal 2023 earnings is set at 19 cents a share, up 35.7% over the past 30 days.
Price and consensus: EGAN
Coupe software – This Zacks Rank #2 (Buy) company is benefiting from strong adoption of Coupa Pay offerings and cloud-based enterprise spend management solutions. Continued momentum in Coupa Advantage Express, Strategic Sourcing, Risk Assess and Source Together solutions is likely to strengthen the company’s subscription services revenues over the long term.
Shares of this San Mateo, California-based company are down 71% year-to-date. Zacks’ consensus estimate for Coupa The software’s fiscal 2023 earnings were unchanged at 44 cents a share for the past 30 days.
Price and consent: COUP
Model no – This San Mateo, California-based company is experiencing a successful transition to a SAAS platform as part of its transformation into a cloud business. A robust go-to-market strategy, the addition of logos, and solid sales execution are driving its revenue growth.
Shares of this Zacks Rank #2 company are back 29.3% year-to-date. Zacks’ consensus estimate for Model N fiscal 2023 earnings is set at 86 cents a share, up 21.1% over the past 30 days.
Price and consent: MODN