For Immediate Release
Chicago, IL – December 11, 2024 – Today, Zacks Equity Research Fortinet FTNT, Zoom Communications ZM and Twilio TWLO.
Industry: Internet Software
The Zacks Internet Software industry is benefiting from accelerated demand for digital transformation and the ongoing shift to the cloud. The high demand for Software as a Service or SaaS-based solutions due to the increasing need for remote working, learning and diagnosis software has been a major driver for industry players. The growing demand for solutions that support hybrid operating environments is a key catalyst.
The increasing deployment of AI and generative AI is driving prospects. The growing proliferation of Augmented and Virtual Reality devices is noteworthy. Increasingly sophisticated cyber-attacks are driving cybersecurity application demand. Fortinet, Zoom Communications and Twilio are benefiting from these trends. However, heightened geopolitical risks, persistent inflation and high interest rates are major headwinds.
Industry Description
The Zacks Internet Software industry comprises companies offering application performance monitoring, infrastructure and application software, DevOps deployment and Security software. Industry participants offer online payment solutions, asset optimization software, multi-cloud application security and delivery, social networking, 3D printing applications and cloud content management solutions.
They use the SaaS-based cloud computing model to deliver solutions to end-users, as well as enterprises. Hence, subscription is the primary revenue source. Advertising is also a major revenue source. Industry participants target a variety of end markets, including banking and financial services, construction, consumer packaged goods, education, energy, legal, various service providers, federal governments, and animal health technology and services.
3 Trends Shaping the Future of the Internet Software Industry
Adoption of SaaS Growing: The industry is benefiting from the continued demand for digital transformation. Growth prospects are alluring, primarily due to the 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 expectations of seamless communications across multiple channels, including voice, chat, email, web, social media and mobile. This increases customer satisfaction and raises the retention rate, driving the top lines of the industry participants.
Moreover, the SaaS delivery model has supported industry players in delivering software applications amid the coronavirus-led lockdowns and shelter-in-place guidance. Remote working, learning and health diagnosis have also boosted the demand for SaaS-based software applications.
Pay-As-You-Go Model Gaining Traction: The increasing customer-centric approach is allowing end-users to perform all required actions with minimal intervention from software providers. The pay-as-you-go model helps Internet Software providers scale their offerings per the needs of different users. The subscription-based business model ensures recurring revenues for industry participants. The affordability of the SaaS delivery model, particularly for small and medium-sized businesses, is another major driver. The cloud-based applications are easy to use. Hence, the need for specialized training is reduced significantly, which lowers expenses, thereby driving profits.
Ongoing Transition to Cloud Creating Opportunities: The growing need to secure cloud platforms amid the increasing incidences of cyber-attacks and hacking drives the demand for web-based cyber security software. As enterprises continue to move their on-premise workload to cloud environments, application and infrastructure monitoring is gaining importance. This is increasing the demand for web-based performance management monitoring tools.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Internet Software industry, placed within the broader Zacks Computer And Technology sector, carries a Zacks Industry Rank #37, which places it in the top 15% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is 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 outperform the bottom 50% by a factor of more than two to one.
The industry’s position in the top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are optimistic about this group’s earnings growth potential. The industry’s earnings estimates for 2024 have moved up 8.3% since Sept. 30, 2024.
Given the positive outlook of the industry, there are several stocks worth picking for healthy portfolio returns. However, before we present the top industry picks, it is worth looking at the industry’s shareholder returns and current valuation first.
Industry Beats S&P 500, Sector
The Zacks Internet Software industry has outperformed the broader Zacks Computer and Technology sector and the S&P 500 Index in the past year.
The industry has returned 51.8% over this period compared with the S&P 500’s jump of 32.2% and the broader sector’s appreciation of 37.5%.
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 3.94X compared with the S&P 500’s 5.81X and the sector’s trailing 12-month P/S of 7.17X.
Over the last five years, the industry traded as high as 7.55X and as low as 1.68X, with a median of 3.5X.
3 Stocks to Buy Right Now
Fortinet- This Zacks Rank #1 (Strong Buy) company is riding on strong demand for its solutions from large enterprise customers. You can see the complete list of today’s Zacks #1 Rank stocks here.
Higher IT spending on cybersecurity is further expected to aid Fortinet in growing faster than the security market. The focus on enhancing its unified threat management portfolio through product development and acquisitions is a tailwind.
FTNT shares have gained 80.9% in the past year. The Zacks Consensus Estimate for 2024 earnings has increased 9.3% to $2.23 per share over the past 30 days.
Twilio- This Zacks Rank #1 company is benefiting from accelerated digital transformations amid a growing hybrid working trend.
TWLO is gaining traction not only from a solid expansion of its existing clientele but also from first-time deals with new customers due to its firm focus on introducing products and a go-to-market sales strategy. Its ongoing cost-saving initiatives are driving profits and margins, which is praiseworthy.
Twilio shares have appreciated 54.8% in the past year. The Zacks Consensus Estimate for TWLO’s 2024 earnings is pegged at $3.64 per share, unchanged over the past 30 days.
Zoom Communications- Another Rank #1 company, Zoom, is gaining significant traction from the hybrid working wave, which has accelerated the need for digital transformation among enterprises.
The launch of AI-driven solutions like Zoom Doc and Zoom AI Companion holds promise. Zoom’s expanding international presence is a key catalyst. The company’s freemium business model helps it win customers rapidly, which it can later convert into paying customers.
ZM shares have returned 17.9% in the past year. The Zacks Consensus Estimate for the company’s fiscal 2025 earnings is pegged at $5.42 per share, up 1.5% in the past 30 days.
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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