The Zacks Internet Software industry primarily comprises software infrastructure and application providers like F5 Networks (FFIV). Social media provider Twitter (TWTR) and online payments company Paypal (PYPL) are also notable companies in this industry.

The industry participants use SaaS-based cloud computing model to deliver solutions to end-users as well as enterprises.

Here are the four major industry themes:

• The industry is benefiting from continued demand for digital transformation. Growth prospects are alluring primarily due to rapid adoption of SaaS, which offers a flexible and cost-effective delivery method of applications. It also cuts down on 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 addressing customer expectation of seamless communications across multiple channels, including voice, chat, email, web, social media and mobile. This drives customer satisfaction and increases retention rate, thereby driving the top line of industry participants. Moreover, the SaaS delivery model has supported industry participants to deliver software applications amid coronavirus-led lockdowns and shelter-in-place guidance. Remote working, learning and diagnosis have also boosted demand for SaaS-based software applications.

• The increasing customer-centric approach is allowing end-users to perform all the required actions while minimal intervention is needed from the software provider’s side. Moreover, the pay-as-you-go model helps Internet Software providers scale their offerings according to the needs of different users. Further, the subscription-based business model ensures recurring revenues for industry participants. The affordability of the SaaS delivery model, particularly for small and medium businesses, is also a major driver. The cloud-based applications are easy to use. Hence, the need for specialized training reduces significantly, which lowers expenses, thereby driving profits.

• Additionally, the growing need to secure cloud platforms, amid growing incidence of cyber-attacks and hacking, drives demand for web-based cyber security software. Further, as enterprises continue to move their on-premise workload to cloud environments, application and infrastructure monitoring are gaining importance. This is creating more demand for web-based performance management monitoring tools.

• Increasing worldwide regulations related to data privacy, and data protection and accessibility do not bode well for the industry participants. The implementation of General Data Protection Regulation, which took effect on May 25, 2018 in the EU, adds to the concerns. Moreover, California Consumer Privacy Act (CCPA), which restricts sales of user data among other things, is a headwind to industry participants. Further, lower ad-spending due to the coronavirus outbreak hinders sector growth.

Zacks Industry Rank Indicates Solid Prospects

The Zacks Internet Software industry, within the broader Zacks Computer And Technology sector, carries a Zacks Industry Rank #48 that places it in the top 19% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. 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.

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 Outperforms Sector and S&P 500

The Zacks Internet Software industry has outperformed the broader Zacks Computer And Technology sector as well as the S&P 500 Index in the past year.

The industry has rallied 36.1% over this period compared with the S&P 500 Index’s rise of 6.1% and the broader sector’s return of 26.4%.

One-Year Price Performance

Industry’s Current Valuation

On the basis of trailing 12-month price-to-sales (P/S), which is a commonly used multiple for valuing Internet Software stocks, we see that the industry is currently trading at 8.86X compared with the S&P 500’s 3.50X and the sector’s trailing 12-month P/S of 3.90X.

Over the last five years, the industry has traded as high as 8.86X, as low as 3.50X and at the median of 5.29X, as the chart below shows.

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

Stocks to Watch Out For

Here we present three stocks that sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

These stocks are well positioned to grow in the near term.

Headquartered in Irvine, CA, analytics solution provider Alteryx (AYX) has returned 53.2% in a year’s time. The Zacks Consensus Estimate for its 2020 earnings has stayed at 49 cents per share in the past 30 days.

Price and Consensus: AYX

Burlington, MA-based Everbridge (EVBG) is riding on strong demand for critical event management (CEM) solutions amid the coronavirus outbreak. Shares have returned 55.7% in a year’s time.

The Zacks Consensus Estimate for the company’s 2020 loss stands at 18 cents per share, unchanged in the past 60 days.

Price and Consensus: EVBG

San Jose, CA-based Zoom Video Communications (ZM) is riding on the coronavirus-induced work-from-home and online-learning trend. Shares have returned a whopping 187.3% in a year’s time.

The Zacks Consensus Estimate for its fiscal 2021 earnings is pegged at $1.19 per share, having been raised 6.3% in the past 30 days.

Price and Consensus: ZM

Zacks Top 10 Stocks for 2020

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