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The outlook for the Internet-Software & Services industry reflects a slowing economy. The industry is highly correlated to the economy and estimates have been coming down over the past year, as concerns over an economic slowdown continued to grow. We are also seeing industry revenue and EBIT flatlining year on year with available cash also appearing to be under some pressure.
In this background, companies like those listed below are shining through for a number of reasons. First, they have adopted a subscription model, thus enhancing the predictability and stability of performance. Second, they are leveraging AI, which will help offset the ongoing economic weakness. Being the backbone of the digital economy, it's hard to see this industry doing badly over the long term. The diversity of players in this group leads to some dissonance.
Valuations have come down in recent months.
About the Industry
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.
Top Themes Driving the Industry
The level of technology adoption by businesses impacts growth. While some companies have already built their platforms, facilitating the development and use of artificial intelligence, others are scrambling to catch up in order to stay competitive. This is further accelerating the adoption of technology that can help collect and analyze data, whether on premise or in the cloud. Additionally, today we have many more cloud-first companies than ever before. Therefore, there is steadily increasing demand for software and services delivered through the Internet.
Despite recent rate cuts, the economy continues to slow down, which isn't good news for an industry thatthrives on a strong economy. No matter what the other variables – and there are many considering the motley crowd that makes up this group – an economic slowdown always leads customers to make do with less, i.e. buy less software. Additionally, the geopolitical tensions in Europe have a bearing on oil prices and supply chains, and therefore, contribute to the volatility and uncertainty within the economy. This means that the outlook for 2024 is still a bit cloudy.
Given the colorful international politics and the resultant volatility in international markets, there is a notable impact on company performance. The fact that they also serve a very broad spectrum of markets also makes it difficult to predict specific outcomes for the group, as a whole. Therefore, players increasingly prefer a subscription-based model, which brings relative stability to their businesses, especially when the companies have critical offerings. The ability to retain subscribers and raise prices as necessary is proving to be the key to success in the current environment.
The higher volume of business being operated through the cloud and the increasing demand for enabling software and services involves infrastructure buildout, which increases costs for players. This causes great fluctuations in profitability as new infrastructure is depreciated and fresh debt is serviced. So even for those players that see revenue growth accelerate, profitability is often a challenge.
Zacks Industry Rank Indicates Deteriorating Prospects
The Zacks Internet – Software & Services industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #159, which places it in the bottom 36% of the 250-odd Zacks classified industries.
The group's Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates that the industry is seeing some tough times. 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 bottom 50% of Zacks-ranked industries is because the earnings outlook for the constituent companies in aggregate is deteriorating. For both fiscal years 2024 and 2025, the aggregate estimate revisions trend was more or less steady up to March, dropping sharply in April and then again in August. The group's aggregate earnings for 2024 are now down 15.7% from Oct. 2023, while the 2025 estimate is down 23.2%.
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.
The Zacks Internet – Software & Services Industry has lagged both the broader Zacks Computer and Technology Sector and the S&P 500, particularly since last November.
The aggregate share price of the industry dropped 4.6% over the past year compared to the broader sector's increase of 38.6% and the S&P 500's increase of 32.4%.
Industry Slightly Overvalued
While many of the individual players are still posting losses, the industry as a whole continues to generate profits. Therefore, on the basis of forward 12-month price-to-earnings (P/E) ratio, we see that the industry is currently trading at a 22.6X multiple, which is a 2.5% premium to the S&P 500 and a 15.5% discount to the technology sector. At current levels, it is also trading at a slight premium to its median level of 21.9X over the past year.
The industry has traded in the range of 20.6X to 23.2X over the past year.
2 Stocks Worth Considering
Okta, Inc.: Okta provides a wide range of identity, and access and authentication solutions for small and medium-sized businesses, universities, non-profits and government agencies within the U.S. and abroad. Its products are sold through a direct sales force and channel partners. It is headquartered in San Francisco, CA.
There was continued momentum in Okta's business in the last quarter. The recurring revenue model is shaping up well with particular strength at large customers. Apart from developing a compelling product line, Okta has been building relationships with its most significant customers, and management has said that the average size of deals through these partners was over 3X the size of its average direct deal.
Bundling products as a platform is another growth strategy that is working well. As customers buy more software, their dependence on OKTA products increases, and retention rates tend to climb. Current (revenue to be recognized in the next 12 months) RPO (remaining performance obligation) grew 13% in the last quarter. The non-current portion of RPO also grew substantially. Therefore, revenue visibility remains excellent. Overall, its million-dollar-plus deals was the fastest growing segment.
That's not to say that the softness in the broader economy is not affecting Okta. Despite recent rate cuts, companies expect continued softness and most of its customers are rationalizing their software expenditure. This is a negative for future revenue growth. While macro concerns limit upsell opportunities, management expects the dollar based retention rate to drop only a point to 110% in the next quarter.
Shares of this Zacks Rank #1 (Strong Buy) company are down 9.9% over the past year. Its 2025 (ending January) and 2026 estimates jumped substantially (19 cents and 10 cents, respectively) from the levels 60 days ago, of which only a couple of cents of increase in both years occurred in the last 30 days. Analysts expect revenue and earnings for the current fiscal year to increase a respective 13.1% and 61.9%, followed by 9.9% revenue growth and 10.1% earnings growth the following year.
Globant S.A.: Globant is a technology services provider with global operations. It provides a broad range of solutions including some combination of software and services, including digital, enterprise technology, ecommerce, AI and other solutions and services directly, as well as through collaborations with AWS, Google Cloud, Microsoft, Oracle, SalesForce, SAP and ServiceNow technology solutions.
Its focus industries include media and entertainment, professional services, technology and telecommunications, travel and hospitality, banks, financial services and insurance, consumer, retail and manufacturing and health care. Globant is headquartered in Luxembourg.
In the last-reported quarter, the company generated strong revenue growth across all regions and verticals, particularly in media, sports and entertainment. Artificial intelligence-driven revenues are growing into a significant contributor with AI-related revenues growing nearly 130%.
Shares of this Zacks Rank #2 (Buy) company are up 8.6% over the past year. Its 2024 estimate increased 6 cents in the last 60 days, while the 2025 estimate increased 9 cents. A penny of this increase in both years was attributable to analyst revisions in the last 30 days. Analysts expect revenue and earnings for the current fiscal year to increase a respective 15.1% and 11.7%, followed by 15.5% revenue growth and 16.3% earnings growth the following year.
Why Haven't You Looked at Zacks' Top Stocks?
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Today you can access their live picks without cost or obligation.
Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
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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Zacks Industry Outlook Highlights Okta and Globant
For Immediate Release
Chicago, IL – October 16, 2024 – Today, Zacks Equity Research discusses Okta, Inc. (OKTA - Free Report) and Globant S.A. (GLOB - Free Report) .
Industry: Software and Services
Link: https://www.zacks.com/commentary/2350434/2-software-services-stocks-with-strong-growth-prospects
The outlook for the Internet-Software & Services industry reflects a slowing economy. The industry is highly correlated to the economy and estimates have been coming down over the past year, as concerns over an economic slowdown continued to grow. We are also seeing industry revenue and EBIT flatlining year on year with available cash also appearing to be under some pressure.
In this background, companies like those listed below are shining through for a number of reasons. First, they have adopted a subscription model, thus enhancing the predictability and stability of performance. Second, they are leveraging AI, which will help offset the ongoing economic weakness. Being the backbone of the digital economy, it's hard to see this industry doing badly over the long term. The diversity of players in this group leads to some dissonance.
Valuations have come down in recent months.
About the Industry
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.
Top Themes Driving the Industry
Zacks Industry Rank Indicates Deteriorating Prospects
The Zacks Internet – Software & Services industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #159, which places it in the bottom 36% of the 250-odd Zacks classified industries.
The group's Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates that the industry is seeing some tough times. 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 bottom 50% of Zacks-ranked industries is because the earnings outlook for the constituent companies in aggregate is deteriorating. For both fiscal years 2024 and 2025, the aggregate estimate revisions trend was more or less steady up to March, dropping sharply in April and then again in August. The group's aggregate earnings for 2024 are now down 15.7% from Oct. 2023, while the 2025 estimate is down 23.2%.
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 Relatively Weak
The Zacks Internet – Software & Services Industry has lagged both the broader Zacks Computer and Technology Sector and the S&P 500, particularly since last November.
The aggregate share price of the industry dropped 4.6% over the past year compared to the broader sector's increase of 38.6% and the S&P 500's increase of 32.4%.
Industry Slightly Overvalued
While many of the individual players are still posting losses, the industry as a whole continues to generate profits. Therefore, on the basis of forward 12-month price-to-earnings (P/E) ratio, we see that the industry is currently trading at a 22.6X multiple, which is a 2.5% premium to the S&P 500 and a 15.5% discount to the technology sector. At current levels, it is also trading at a slight premium to its median level of 21.9X over the past year.
The industry has traded in the range of 20.6X to 23.2X over the past year.
2 Stocks Worth Considering
Okta, Inc.: Okta provides a wide range of identity, and access and authentication solutions for small and medium-sized businesses, universities, non-profits and government agencies within the U.S. and abroad. Its products are sold through a direct sales force and channel partners. It is headquartered in San Francisco, CA.
There was continued momentum in Okta's business in the last quarter. The recurring revenue model is shaping up well with particular strength at large customers. Apart from developing a compelling product line, Okta has been building relationships with its most significant customers, and management has said that the average size of deals through these partners was over 3X the size of its average direct deal.
Bundling products as a platform is another growth strategy that is working well. As customers buy more software, their dependence on OKTA products increases, and retention rates tend to climb. Current (revenue to be recognized in the next 12 months) RPO (remaining performance obligation) grew 13% in the last quarter. The non-current portion of RPO also grew substantially. Therefore, revenue visibility remains excellent. Overall, its million-dollar-plus deals was the fastest growing segment.
That's not to say that the softness in the broader economy is not affecting Okta. Despite recent rate cuts, companies expect continued softness and most of its customers are rationalizing their software expenditure. This is a negative for future revenue growth. While macro concerns limit upsell opportunities, management expects the dollar based retention rate to drop only a point to 110% in the next quarter.
Shares of this Zacks Rank #1 (Strong Buy) company are down 9.9% over the past year. Its 2025 (ending January) and 2026 estimates jumped substantially (19 cents and 10 cents, respectively) from the levels 60 days ago, of which only a couple of cents of increase in both years occurred in the last 30 days. Analysts expect revenue and earnings for the current fiscal year to increase a respective 13.1% and 61.9%, followed by 9.9% revenue growth and 10.1% earnings growth the following year.
Globant S.A.: Globant is a technology services provider with global operations. It provides a broad range of solutions including some combination of software and services, including digital, enterprise technology, ecommerce, AI and other solutions and services directly, as well as through collaborations with AWS, Google Cloud, Microsoft, Oracle, SalesForce, SAP and ServiceNow technology solutions.
Its focus industries include media and entertainment, professional services, technology and telecommunications, travel and hospitality, banks, financial services and insurance, consumer, retail and manufacturing and health care. Globant is headquartered in Luxembourg.
In the last-reported quarter, the company generated strong revenue growth across all regions and verticals, particularly in media, sports and entertainment. Artificial intelligence-driven revenues are growing into a significant contributor with AI-related revenues growing nearly 130%.
Shares of this Zacks Rank #2 (Buy) company are up 8.6% over the past year. Its 2024 estimate increased 6 cents in the last 60 days, while the 2025 estimate increased 9 cents. A penny of this increase in both years was attributable to analyst revisions in the last 30 days. Analysts expect revenue and earnings for the current fiscal year to increase a respective 15.1% and 11.7%, followed by 15.5% revenue growth and 16.3% earnings growth the following year.
Why Haven't You Looked at Zacks' Top Stocks?
Since 2000, our top stock-picking strategies have blown away the S&P's +7.0 average gain per year. Amazingly, they soared with average gains of +44.9%, +48.4% and +55.2% per year.
Today you can access their live picks without cost or obligation.
See Stocks Free >>
Join us on Facebook: https://www.facebook.com/ZacksInvestmentResearch/
Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
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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.