The outlook for the Internet-Software & Services industry reflects a relatively slow economy. The industry is highly correlated to the economy, and estimates have been moving up and down over the past year as expectations on interest rate decisions varied. The industry appears to be in cost-saving mode as operating expenses are coming down to generate profit despite revenue softness. Capital investments are also being limited, aside from a couple of companies.
 
In this background, companies like RingCentral (RNG) and Criteo (CRTO) are shining through for a number of reasons. First, they are leveraging AI, which is translating to revenue growth and helping offset the ongoing economic weakness. Second, they have developed systems of client retention through subscriptions and platforms.
 
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 started going up in recent months.

About the Industry

The Internet Software & Services industry is relatively small, 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 that thrives in 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 and services. Additionally, the geopolitical tensions in Europe and the Middle East 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 2025 is still a bit cloudy.

• Given the colorful international politics and the resultant volatility in international markets, there is notable impact on the performance of each player. 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. Players increasingly prefer a subscription-based model, which brings relative stability to their businesses. This works especially well 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. That said, most of the companies in this industry have been working down debt over the last few years with a positive impact on results.

Zacks Industry Rank Indicates Good Prospects

The Zacks Internet – Software & Services industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #45, which places it in the top 18% 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 growth prospects for the industry remain strong. 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 aggregate estimate revision trend would warrant some caution however. That is because the estimates for both fiscal years 2025 and 2026 have moved around quite a bit. The 2025 estimate was more or less steady through July 2024 before dipping in August. It picked up again through December before dropping back down thereafter. The 2026 estimate was also relatively steady through July, dropping in August and picking up again from October. Net-net, both estimates have deteriorated over the past year.

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 Improving

The Zacks Internet – Software & Services Industry lagged both the broader Zacks Computer and Technology Sector and the S&P 500 through most of 2024, reversing the trend this year. It drew level in February and pulled ahead of both this month.

Overall, the industry returned 9.5% over the past year compared with the broader sector’s return of 7.1% and the S&P 500’s 8.8%.

One-Year Price Performance

Image Source: Zacks Investment Research

Industry Slightly Overvalued

On the basis of forward 12-month price-to-earnings (P/E) ratio, we see that the industry is currently trading at a 22.3X multiple, which is a 7.4% premium to the S&P 500 and a 7.0% discount to the technology sector. Technology stocks usually trade at a higher multiple because investors pay a higher premium for innovation. In this case, it is also worth noting that the stock is trading at a premium to its own median level of 18.3X over the past year.

The industry has traded in the range of 16.4X to 24.1X over the past year, as the chart below shows.

Forward 12 Month Price-to-Earnings (P/E) Ratio

Image Source: Zacks Investment Research

2 Stocks Worth Considering

RingCentral Inc. (RNG): Belmont, California-based RingCentral’s AI-powered product portfolio includes the Unified Communications as a Service (UCaaS), Contact Center as a Service (CCaaS), Video & Events, and RingSense AI solutions. Its success is as much a function of its innovative communications and collaboration solutions as its diverse range of strategic partners, global service providers, channel partners and third-party developers.

The company’s new AI-based solutions are doing extremely well and management has said that in the last quarter, average recurring revenue ARR from new products exceeded $50 million for the first time. Since then, the company has launched the AI receptionist (AIR), which operates as a digital phone assistant, automatically recording key details on calls, including decisions and action items; and generate context aware chat messages in real time, as well as context-based SMS.

The quarter also saw enterprise ARR growth of 7%, 30 deals of over a million dollars each. Another important highlight was its selection by GenPact, a global advanced technology services and solutions company with 125,000 employees in 30+ countries.

Shares of this Zacks Rank #1 (Strong Buy) company have lost 24.7% over the past year. The Zacks Consensus Estimate for 2025 has increased by a penny in the last 30 days. The 2026 earnings estimate remains unchanged. Analysts are looking for revenue growth of 5.7% in 2025 and 2.5% in 2025 and 6.26% the following year.

Price and Consensus: RNG

Image Source: Zacks Investment Research

Criteo S.A. (CRTO): Paris-based Criteo S.A. provides a commerce media platform delivering marketing and monetization services in North and South America, Europe, the Middle East, Africa, and the Asia-Pacific. Its unified, AI-driven platform directly connects advertisers with retailers and publishers to drive commerce on retailer sites and on the open Internet.

The company’s strategy is to harness AI to expand its reach across audiences, seeking to expand its ecosystem across advertisers, retailers and third-party platforms, using the commerce dataset to feed its AI models.

As advertiser budgets are sensitive to macroeconomic factors like the geopolitical conflicts in Ukraine and the Middle East, as well as things like inflation and interest rates back home, this market hasn’t done exceptionally well in the past year. However, Criteo was able to leverage its Retail Media platform to offset some of this softness. As brands and retailers continued to be onboarded onto its platform, networking effects kicked in, helping results. Its client base was strong at around 17,000 with client retention remaining at around 90% for the third straight year.

Shares of this Zacks Rank #2 (Buy) company have gained 3.3% over the past year. The Zacks Consensus Estimate for 2025 has increased 43 cents (10.3%) in the last 60 days. The 2026 earnings estimate has also increased 76 cents (18.3%). Analysts expect sales to increase 4.8% this year with earnings growing 0.9%. Earnings are currently expected to grow 6.5% the following year on the back of 6.9% revenue growth.

Price and Consensus: CRTO

Image Source: Zacks Investment Research

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This article originally published on Zacks Investment Research (zacks.com).

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