The Zacks Internet Software industry has been 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 have been driving cybersecurity application demand. Unity Software U, nCino NCNO and Digital Turbine APPS 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 Grows: The industry has been benefiting from the continued demand for digital transformation. Growth prospects are alluring due to the rapid adoption of SaaS, which offers a flexible and cost-effective delivery method for applications. It also cuts down on deployment time compared with 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 work, learning and health diagnosis have also boosted the demand for SaaS-based software applications.

Pay-As-You-Go Model Gains 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 different user needs. 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, driving profits.

Ongoing Transition to Cloud Creates 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 #83, which places it in the top 34% 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 2025 have moved up 11.8% since June 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 Lags S&P 500, Beats Sector

The Zacks Internet Software industry has outperformed the broader Zacks Computer and Technology sector but lagged the S&P 500 Index in the past year.

The industry has returned 16.8% over this period compared with the S&P 500’s jump of 17.1% and the broader sector’s appreciation of 15.2%.

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 4.74X compared with the S&P 500’s 5.18X and the sector’s trailing 12-month P/S of 6.15X. 

Over the last five years, the industry traded as high as 5.08X and as low as 3.94X, with a median of 4.36X, as the charts below show.

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

3 Stocks to Buy Right Now

Unity Software - This Zacks Rank #1 (Strong Buy) company is benefiting from the strong adoption of its game engine. Roughly 70% of the top 1,000 mobile games worldwide were made with Unity’s platform, including the top three grossing mobile games, and 30% of the top 1,000 PC games on Steam. You can see the complete list of today’s Zacks #1 Rank stocks here.

Apart from gaming, Unity Software is benefiting from the strong adoption of its 3D development platform in markets like automotive and retail. A strong user base that includes Toyota and Raytheon is noteworthy. Expanding partner base, which now includes Google, is providing a boost to U’s position as the leading real-time 3D development platform. 

Unity Software shares have appreciated 14.1% year to date. The Zacks Consensus Estimate for 2025 loss has narrowed 3 cents to $1.22 per share over the past 30 days.

Price and Consensus: U

nCino - This Zacks Rank #1 company is benefiting from strong sales momentum, highlighted by multi-solution deals and expansion in key markets, such as the United States, Japan and Norway. NCNO’s new pricing framework and strategic acquisitions, including FullCircl and DocFox, are driving revenue growth and positioning it for continued success in the global financial services sector.

In third-quarter fiscal 2025, nCino secured major deals, including an expansion with a top-40 U.S. bank for commercial and small business lending and signing its largest customer in Japan — Tokushima Taisho Bank. This highlights the strong demand for its solutions across diverse markets. This expansion into international markets solidifies nCino’s position as a global leader in banking technology solutions.

However, intense competition in the fintech industry, particularly from companies offering similar cloud-based solutions to financial institutions, has been a headwind for nCino.

nCino shares have declined 6.8% year to date. The Zacks Consensus Estimate for NCNO’s 2025 earnings is pegged at 72 cents per share, unchanged over the past 30 days.

Price and Consensus: NCNO

Digital Turbine – Another Zacks Rank #1 company, Digital Turbine, expects stable device sales in the United States in 2025, which bodes well for its prospects. Strong On-Device international revenues, driven by robust advertiser demand, are noteworthy. A rich partner base that includes Motorola, Nokia, ONE Store, Xiaomi, Telecom Italia Brazil and T-Mobile is a growth driver. 

Digital Turbine shares have skyrocketed 102.9% in the year-to-date period. The Zacks Consensus Estimate for the company’s fiscal 2025 earnings is pegged at 30 cents per share, up a dime in the past 30 days.

Price and Consensus: APPS

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

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