2 Software and Internet Services Stocks to Take a Closer Look at – July 16, 2021

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The outlook for the Internet software and services industry looks negative given the trend of revised estimates over the past year, mainly due to the pandemic. But there are a number of businesses here that have in fact been positively impacted by the pandemic and the digitalization trend it has sparked. The diversity of the actors in this group is the reason for this dissonance.

Being the backbone of the digital economy, it’s hard to see this industry doing badly in the long run. However, the short-term outlook is bleak. To make matters worse, the industry is not cheap. In these circumstances, Criteo (CRTO Free report) and Donnelley Financial Solutions (DFIN Free Report) are the only ones that deserve a closer look.

About the industry

The Internet software and services industry is a relatively small industry primarily involved in delivering platforms, networks, solutions and services for online businesses and facilitating customer interaction and communication. use of Internet services.

This industry mainly includes Internet information providers like VeriSign Inc. (VRSN).

Three industry driving themes

  • The overall impact of COVID has been mixed for the industry. While this required working from home for employees, the industry, being tech-centric by nature, had relatively fewer issues with it. On the other hand, business continuity issues have accelerated the shift to cloud-based work for many companies, while service providers, whether work-related or not, have also switched to channels. internet-based. Retail is another important segment that has achieved huge amounts of online business. All these developments were positive for the industry (in terms of turnover) and partially offset the negative impact of the decline in activity among traditional players. At least some of the bright spots will survive the pandemic. In other cases, the return to physical operations will be gradual. But any improvement in the general level of economic growth will also improve the outlook for the industry.
  • The higher volume of business operated through the cloud and the growing demand for software and activation services, however, means building infrastructure, which increases costs for gamers. This causes large fluctuations in profitability as new infrastructure is depreciated and new debt is paid off. The pandemic has exacerbated this situation resulting in low profitability in 2020. The rebound in March is mainly due to lower operating costs.
  • The level of technology adoption by businesses and the proliferation of connected consumer devices that could help people connect and do business online are also impacting growth. The high penetration of mobile devices among users and the necessity induced by the pandemic are pushing more and more companies to adopt technology from which they had previously moved away due to the costs involved.

Zacks’ ranking in industry indicates uncertain outlook

The Internet Industry – Zacks Software and Services is housed within the larger Zacks IT and Technology industry. It is ranked Zacks Industry Rank # 224, which places it in the bottom 10% of over 250 Zacks ranked sectors.

The group’s Zacks Industry Rank, which is essentially the average Zacks Rank of all member stocks, indicates that there are issues with the industry’s near-term outlook. Our research shows that the top 50% of industries ranked by Zacks outperform the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the bottom 50% of industries ranked by Zacks is the result of negative earnings prospects for all of the constituent companies. Looking at revisions to aggregate estimates, it appears that analysts’ confidence in the group’s earnings growth potential for 2021 has been declining more or less steadily since last July. Over the past year, the estimate of average earnings for 2021 is down 38.8%. The estimate for 2022 has been picking up since February but is still down 20.1% compared to last July.

Before we feature a few stocks that you might want to consider for your portfolio, let’s take a look at the recent stock market performance and industry valuation.

The stock market performance of the industry suffers

Last year’s performance of Zacks ‘Internet – Software and Services industry shows that it is mostly lagging behind Zacks’ IT and tech sector at large, as well as the S&P 500. But after briefly peaking in February, it fell sharply and the gap with the two groups has widened since.

The overall industry share price has appreciated 18.6% in the past year compared to the 45.5% increase in the broad sector and 37.4% for the S&P 500 .

One-year price performance

Image source: Zacks Investment Research

Current industry assessment

While many players are making losses right now, the industry as a whole continues to generate profits. So, based on the 12-month forward price-to-earnings (P / E) ratio, which is a multiple commonly used to value internet companies, we find that the industry is currently trading at a multiple of 59.1X ( close to its median value of 58.1X). The P / E of the S&P 500 is 22.1X (lower than its median value). It is also overvalued against the sector’s 12-month forward P / E of 28.1X.

The shares traded in an annual range of 48.0X to 67.9X, as shown in the chart below.

12-month forward price / earnings (P / E) ratio

Zacks investment research
Image source: Zacks Investment Research

2 actions worth taking a closer look

Donnelley Financial Solutions Inc.: Donnelley Financial provides software and services for the creation, management and distribution of content, as well as multilingual localization and data analysis services.

Strong capital markets, customer adoption of new recurring software products, contribution of relatively new products like Arc Digital and next generation ActiveDisclosure platform, strong transaction activity, favorable mix of software solutions contribute all to the dynamics of its activity.

As a result, Zacks’ consensus estimate for 2021 is up $ 1.54 (86.0%) over the past 60 days. The 2022 estimate is up $ 1.17 (49.0%). And the shares of this company Zacks Rank # 1 have risen 280.7% in the past year.

Price and consensus: DFIN

Zacks investment research
Image source: Zacks Investment Research

Criteo SA: This ad technology solutions provider has access to more than 20,000 advertisers in 100 countries on the one hand, and customer data relating to $ 2 billion in daily online sales and 4 billion product referrals. somewhere else.

The company is poised to take advantage of the massive push towards e-commerce in recent years. While the pandemic has impacted advertiser budgets and limited spending, with a corresponding negative impact on the company’s bottom line, it is encouraging to note that business is coming back strongly and the CRTO has also started to see major multi-year agreements. With the e-commerce opportunity expected to grow from 16% of total sales today to 23% by 2023, Criteo, with its ability to deliver marketing insights and performance gains, is expected to experience steady growth.

This company Zacks Rank # 2 (Buy) is up 235.0% from last year. Zacks’ consensus estimate for BPA 2021 has risen 7 cents (3.2%) in the past 60 days. The estimate for 2022 was up 14 cents (6.6%).

Price and consensus: CRTO

Zacks investment research
Image source: Zacks Investment Research


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