3 Stocks To Buy In Internet Software & Services

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The outlook for the Internet-Software & Services industry appears negative-going by the estimated revision trend over the past year, driven largely by the pandemic. But there are a number of companies here that were in fact positively impacted by the pandemic and the rush to digitize trend that it gave rise to. The diversity of players 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 over the next year or two. However, the significant decline in overall business levels are playing a spoiler. As such, it makes sense to dig deeper to find individual stocks with strong outlooks because chances are they will have an attractive valuation. This search exposed Criteo (CRTO Quick Quote CRTO - Free Report), Momo Inc (MOMO Quick Quote MOMO - Free Report), and Globant S.A (GLOB Quick Quote GLOB - Free Report) that look like good investments right now.

About The Industry

The Internet Software & Services industry is a relatively small industry primarily involved in enabling platforms, networks, solutions, and services for online businesses and facilitating customer interaction and use of Internet-based services.   

Three themes driving the industry:

  • The overall impact of COVID has been mixed for the industry. Although it necessitated work from home for employees, the industry, being by nature tech-centric, had relatively fewer issues with this. On the other hand, business continuity concerns accelerated the shift to cloud-based working for many companies, while service providers, both work-related and otherwise, also moved to Internet-based channels. Another big segment that did humongous amounts of business online was retail. All of these moves were positive for the industry (in terms of revenue) and partially offset the negative impact of declining business at brick-and-mortar players. At least some of the positives will outlive 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 prospects for the industry.   
  • The higher volume of business being operated through the cloud and the increasing demand for enabling software and services however involves infrastructure buildout, which increases costs for players. This causes great fluctuations in profitability as new infrastructure is depreciated and fresh debt is serviced. The pandemic has exacerbated this situation. The net cash per share, which has been moving up over the past three years took a dip in the last quarter as receivables jumped, although it didn’t go below the pre-pandemic level.
  • The level of technology adoption by businesses and the proliferation of connected consumer devices that might help people connect and do business online also impacts growth. The high penetration of mobile devices among users and pandemic-driven necessity is driving more businesses to adopt technology that they earlier stayed away from because of the cost involved.
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