Internet - Software & Services Outlook: Opportunities Exist

 | Feb 21, 2020 03:12AM ET

The Internet Software & Services industry is a relatively small industry primarily involved in enabling platforms, networks, solutions and services for online businesses and facilitating customer interaction and use of Internet based services.

Here are the three major themes in the industry:

  • As businesses increasingly move their operations to the cloud, the demand for enabling software and services will continue to increase. This means high costs for players as they continue to expand their offerings in the race to grab more business. As a result, most players continue to make little to no profit despite strong revenue growth.
  • It follows that the general level of industrial growth and progress also impacts the amount of business transacted online.
  • The level of technology adoption by businesses and the proliferation of connected consumer devices that might help people connect and do business online also impacts growth. As a result of the high penetration of mobile devices among users, it now makes sense for businesses to adopt technology that they earlier stayed away from because of the cost involved.


Zacks Industry Rank Indicates Bright Prospects

The Zacks Internet – Software & Services industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #44, which places it at the top 17% of more than 250 Zacks industries. It includes players like VeriSign (NASDAQ:VRSN) (VRSN).

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates that near-term prospects remain bright. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analyst confidence in the group’s earnings growth potential is wavering. While estimates have held steady since October, there was a drop in February, which took the industry’s 2020 average earnings estimate revision down to 2.2%. The estimate for 2019 is up 18.6%.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry’s Stock Market Performance Is Impressive

The past year’s performance of the Zacks Internet – Software & Services Industry shows a net gain over the broader Zacks Computer and Technology Sector as well as the S&P 500 index.

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Aggregate share price of the industry appreciated 33.5% over this period compared to the S&P 500 index’s gain of 20.5% and broader sector’s increase of 28.9%.

One-Year Price Performance