Zacks Industry Outlook spotlights Globant and VeriSign
For immediate release
Chicago, IL – April 4, 2022 – Today Zacks Equity Research discusses Globant SA GLOB and VeriSign VRSN.
Industry: Internet software services
The outlook for the software and Internet services industry appears negative due to the trend of revisions in estimates over the past year, mainly due to the pandemic. However, some companies have been positively impacted by the pandemic and the rush to digitization it has generated. The diversity of actors in this group is the reason for this dissonance.
Being the backbone of the digital economy, it’s hard to see this industry performing poorly in the long term. However, the short-term outlook has deteriorated given negative economic indicators, rising inflation and geopolitical tensions. To make matters worse, the valuation remains high. Under these circumstances, Globant and Verisign are the only ones that warrant further scrutiny.
About the industry
The Internet software and services industry is a relatively small industry that primarily involves enabling platforms, networks, solutions, and services for online businesses and facilitating customer interaction and use of Internet services.
- The overall impact of COVID has been mixed for the industry. Although this necessitated working from home for employees, the industry, being technology-centric in nature, had relatively less of an issue with this. 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 shifted to cloud-based channels. on the Internet. Another large segment that did huge amounts of online commerce was retail. All of these moves were positive for the industry (in terms of revenue) and partially offset the negative impact of the decline in physical player activity. At least some of the positive aspects will survive the pandemic. In other cases, the return to physical operations is still underway and hampered by new virus strains, inflation and other concerns.
- Geopolitical tensions in Europe have an impact on oil prices and certain supply chains, and therefore also on large segments of the economy. And some experts fear that the Fed’s actions to contain inflation could have a deflationary impact in the current environment. Since any improvement in the general level of economic growth improves the outlook for the industry, the current environment contributes to the negative outlook.
- The higher volume of business operated through the cloud and the growing demand for enabling software and services require the building of infrastructure, which increases costs for players. This leads to large swings in profitability as new infrastructure is written off and new debt is repaid. So even for players where revenue growth has accelerated, the pandemic has exacerbated this situation, resulting in poor profitability in 2020, with 2021 growing slightly from 2020 levels but well below 2019 levels.
- The level of technology adoption by businesses and the proliferation of connected consumer devices that could help people connect and conduct business online are also impacting growth. The high penetration of mobile devices among users and the pandemic-related necessity are pushing more and more businesses to adopt technology that they previously shunned due to the costs involved. This is positive for the industry.
Zacks’ Industry Ranking Indicates Continued Challenges
The Zacks Internet – Software & Services industry is housed in the wider Zacks IT and technology sector. It carries a #200 Zacks Industry ranking, which places it in the top 21% 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.
That of the group Zacks Industry Rankingwhich is essentially the average of the Zacks ranking of all member stocks, indicates that while the industry is recovering from the problems caused by the pandemic, some problems remain.
The industry’s positioning in the bottom 50% of industries ranked by Zacks is due to the earnings outlook for the constituent companies as a whole continuing to deteriorate. Looking at revisions to aggregate estimates, it appears that analyst confidence in the group’s earnings growth potential for 2022 has been falling more or less steadily since last April. Over the past year, the average earnings estimate for 2022 has decreased by 42.9%. The estimate for 2023 slipped even further, down 51% from last April.
Before outlining a few stocks you might consider for your portfolio, let’s take a look at recent stock market performance and the industry valuation picture.
The stock market performance of the industry suffers
Last year’s performance of the Zacks Internet – Software and Services sector shows that it has mostly lagged the broader Zacks IT and Technology sector, as well as the S&P 500.
The industry’s overall stock price has fallen 22.7% over the past year, compared to the broader sector’s 6.3% rise and the S&P’s 15.0% rise 500.
Current industry assessment
While many players are still registering losses, 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 sector is currently trading at 60.6X, close to its highest multiple of 64.6X over the year. elapsed. The P/E of the S&P 500 is 20.25X (21.66X at its midpoint). The industry is also overvalued compared to the sector’s 12-month forward P/E of 24.74X (close to its low point of last year).
The industry traded in the yearly range of 64.57X to 77.89X.
2 stocks to consider
Global SA: Globant, based in Luxembourg, offers a wide range of technological services covering engineering, design and innovation. These services are used in e-commerce and other systems related to the distribution of products; finance-related systems; and game and graphics engineering systems. It also offers a range of other services. As these services facilitate the digital transformation of businesses, Globant is positioned to grow for years to come.
Globant has a list of large clients and continues to target large clients. Additionally, he seeks to deepen relationships with these large clients to generate a steady stream of revenue. This is evident from the fact that its customer base grew by 42% in 2021, with customers spending over $1 million increasing by 43%.
This Zacks #2 ranked company grew 24.8% over the past year. The Zacks consensus estimate for 2022 EPS has risen 44 cents (9.8%) over the past 60 days. The estimate for 2023 has increased by 49 cents (8.8%).
VeriSign: VeriSign provides Internet infrastructure services, including domain name registration services and infrastructure assurance services.
Verisign is benefiting from a growing trend of new domain name registrations as well as price increases of up to 7% under the Third Amendment to the .com Registry Agreement with ICANN. The stable nature of the business related to digital transformation leads to relatively stable cash flows. Concerns include the easing of new/early business renewals (related to macro concerns and search algorithms) and competition from Google’s free public domain name service.
This Zacks No. 2 ranked company grew 10.2% over the past year. The Zacks consensus estimate for 2022 EPS is unchanged over the past 60 days, while the estimate for 2023 has risen by pennies.
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Past performance is not indicative of future results. The potential for loss is inherent in any investment. This document is provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold any security. No recommendation or advice is given as to whether any investment is suitable for any particular investor. It should not be assumed that investments in the securities, companies, sectors or markets identified and described have been or will be profitable. All information is current as of the date hereof and is subject to change without notice. The views or opinions expressed may not reflect those of the company as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management of securities. These returns come from hypothetical portfolios composed of stocks with Zacks Rank = 1 that have been rebalanced monthly without transaction fees. These are not the returns of actual stock portfolios. The S&P 500 is an unmanaged index. To visit https://www.zacks.com/performance for more information on the performance figures displayed in this press release.
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