HomeTechnologyInternet3 Internet Software Stocks to Buy in a Prospering Industry - November...

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

The pockets Internet software the industry is suffering from heightened geopolitical risks due to the conflict between Russia and Ukraine, higher wage inflation, currency fluctuations and the supply chain disruptions caused by the pandemic. But industry participants like it Coupa software (COUP free report) , Model N (MODN free report) and again (EGAN Free Report) benefit from the accelerated demand for digital transformation and the continued shift to the cloud. The high demand for Software as a Service or SaaS based solutions due to the increasing need for software for remote working, learning and diagnostics as well as cybersecurity applications has been a major driver. The growing demand for solutions that support hybrid operating environments is striking. Robust IT spending on software is another positive factor for industry participants.

Industry description

The Zacks Internet Software industry includes companies that offer application performance monitoring, as well as infrastructure and application software, DevOps implementation, and security software. Industry participants provide multi-cloud application security and delivery, social networking, online payments, and 3D printing applications and solutions. The industry participants use the SaaS-based cloud computing model to deliver solutions to both end users and enterprises. Subscriptions are therefore the main source of income. Advertisements are also an important 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: The industry is benefiting from the continued demand for digital transformation. The growth prospects are particularly attractive 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 aims to deliver applications to any user, anywhere, anytime and on any device. It has proven effective in meeting customer expectations for seamless communication across multiple channels, including voice, chat, email, web, social media, and mobile. This drives customer satisfaction and increases the retention rate, boosting the top positions of the industry participants. In addition, the SaaS delivery model has supported industry participants in delivering software applications amid the coronavirus-induced lockdowns and on-site guidance. Remote working, learning, and diagnostics have also driven demand for SaaS-based software applications.

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Pay-As-You-Go model is gaining traction: The increasingly customer-centric approach enables end-users to perform all required actions with minimal intervention from the 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 creates recurring revenue for the industry participants. The affordability of the SaaS delivery model, especially for small and medium-sized businesses, is another key driver. The cloud-based applications are easy to use. This significantly reduces the need for specialized training, which reduces costs and thus increases profits.

Continued transition to the cloud creates opportunities: In addition, the growing need to secure cloud platforms amid the increasing incidence of cyberattacks and hacking is driving the demand for web-based cybersecurity software. As enterprises continue to move their on-premise workloads to cloud environments, monitoring applications and infrastructure becomes increasingly important. This increases the demand for web-based performance management monitoring tools.

Zacks Industry Rank indicates clear outlook

The Zacks Internet Software industry, within the wider Zacks Computer And Technology sector, has a Zacks Industry Rank #64 placing it in the top 25% of over 250 Zacks industries.

From the group Zacks Business Ranking, which is the average of the Zacks Rank of all member stocks, indicates good near-term prospects. Our research shows that the top 50% of industries ranked on Zacks outperform 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 at shareholder returns and the industry’s current valuation.

Sector lags and S&P 500

The Zacks Internet Software industry has underperformed the broader Zacks Computer And Technology sector over the past year, as has the S&P 500 Index.

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The industry is down 60.2% over this period compared to the S&P 500 index’s 17.9% drop and the broader industry’s 32.1% drop.

One-year price performance

Current industry valuation

Based on the 12-month price-to-sale (P/S), which is a commonly used multiple for valuing Internet Software stock, we see the industry currently trading at 2.22X compared to the S&P 500s 3.93X and the industry’s lagging 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 the median of 2.79x, as the chart below shows.

Price-Sales Ratio (P/S) over 12 months

3 stocks to buy now

again – Based in Sunnyvale, CA, this Zacks Rank #1 (Strong Buy) company automates customer engagement with an innovative SaaS platform powered by artificial intelligence and knowledge capabilities. You can see the full list of current Zacks #1 Rank stocks here.

eGain’s growing customer base is an important catalyst. The company primarily sells to large companies in the financial services, telecommunications, retail, government, healthcare and utilities industries.

eGain’s stock price is down 11.1% year to date. Zacks’ consensus estimate for the company’s fiscal year 2023 earnings is pegged 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 robust adoption of Coupa Pay offerings and cloud-based Business Spend Management solutions. Continued momentum in Coupa Advantage Express, Strategic Sourcing, Risk Assess and Source Together solutions is likely to bolster the company’s revenue from subscription services over the long term.

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Shares of this San Mateo, CA-based company are down 71% year to date. Zacks’ consensus estimate for Coupa Software’s earnings for fiscal year 2023 are unchanged over the last 30 days at 44 cents per share.

Price and Consensus: COUP

Model N – This San Mateo, CA based company is experiencing a successful transition to a SAAS platform as part of its transformation to a cloud company. Solid go-to-market strategy, logo additions and robust sales execution are the drivers of revenue growth.

Shares of this Zacks Rank #2 company have returned 29.3% so far. Zacks’ consensus estimate for Model N earnings for fiscal year 2023 is pegged at 86 cents per share, up 21.1% over the past 30 days.

Price and Consensus: MODN

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