2 actions to defy the Internet software and services industry – November 24, 2021


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. However, some companies have been positively impacted by the pandemic and the trend towards the digitalization rush that it has sparked. The diversity of the actors in this group is at the origin of 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 could have been better. To make matters worse, valuations are skyrocketing. In these circumstances, Criteo (CRTO) 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.

Three themes at the heart of the industry

  • 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 movements were positive for the industry (in terms of turnover) and partially offset the negative impact of the decline in activities among traditional players. At least some of the positives will survive the pandemic. In other cases, the return to physical operations will be positive, as this segment returns to normal. 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, with 2021 exceeding 2020 levels but not yet quite at 2019 levels.
  • 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 a technology from which they had previously moved away due to the costs involved.

Zacks’ industry ranking indicates recovery is underway

The Internet Industry – Zacks Software and Services is housed within the larger Zacks IT and Technology industry. It carries a Zacks Industry Rank # 95, which places it in the top 38% of over 250 Zacks ranked industries. 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 group’s Zacks industry rankings, which is essentially the Zacks rank average of all member stocks, indicates that while the industry is recovering from the issues caused by the pandemic, some issues remain.

Therefore, despite the industry positioning in the top 50% of industries ranked by Zacks, the earnings outlook for the constituent companies as a whole continues to deteriorate. 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 November. Over the past year, the estimate of average earnings for 2021 is down 63.2%. The estimate for 2022 is not much better, down 42.3% from last November.

Before presenting 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

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

The industry’s overall share price has appreciated just 2.6% over the past year, compared to the industry-wide 32.6% increase and 30% increase. 0% of 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, we see that the industry is currently trading at 77.57X, close to its highest multiple of 77.60X over the past year. ‘last year. The P / E of the S&P 500 is 21.99X (at its midpoint). The industry is also overvalued against the industry’s 12-month forward P / E of 29.36X (at its highest level in the past year).

The industry has traded in an annual range of 57.71X to 77.60X, as shown in the chart below.

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

Zacks investment researchImage 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.

Continued strength in financial markets, customer adoption of recurring new software products, strong demand for its Arc Digital and ActiveDisclosure compliance software, as well as its Venue transactional software. In addition, a stronger combination of software solutions continues to increase profitability.

This company Zacks Rank # 1 (Strong Buy) is up 206.7% from last year. Zacks’ consensus estimate for 2021 EPS has risen by $ 1.05 (25.8%) in the past 30 days. The estimate for 2022 has increased by $ 1.25 (28.2%).

Price and consensus: DFIN

Zacks investment researchImage source: Zacks Investment Research

Channel Advisor (ECOM Free report) : This provider of cloud-based e-commerce solutions and services, including marketplaces, price comparisons, paid searches, social campaigns, flexible feeds, online stores and rich media, serves the traditional retailers, online retailers, brand manufacturers and advertising agencies.

The company has benefited from investments facilitating the digital transformation of its brands, as well as a focus on product innovation, channel expansion and revenue retention. It also continues to expand its customer base, adding Master Lock, Detroit Diesel, Sennheiser, Xiaomi, and Natural Balance Pet Foods in the last quarter.

This company Zacks Rank # 2 (Buy) is up 82.1% from last year. Zacks’ consensus estimate for BPA 2021 has risen 8 cents (9.3%) in the past 30 days. The estimate for 2022 was up 7 cents (7.8%).

Price and consensus: ECOM

Zacks investment researchImage source: Zacks Investment Research


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