News

The Internet-Software & Services industry is highly correlated to the economy; consequently, estimates are moving down as tariffs, inflation and interest rate decisions increase economic uncertainty. The industry appears to be in cost-saving mode as operating expenses are coming down to generate profit despite revenue softness. Capital investments are also being limited, barring a couple of companies.

In this background, companies like Criteo (CRTO) and RingCentral (RNG) are shining through for a number of reasons. First, they are leveraging AI, which is translating to revenue growth and helping offset the ongoing economic weakness. Second, they have developed systems of client retention through subscriptions and platforms.

Being the backbone of the digital economy, it’s hard to see this industry doing badly over the long term. The diversity of players in this group leads to some dissonance.

Valuations have been improving since April.

About the Industry

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

Top Themes Driving the Industry

Zacks Industry Rank Indicates Limited Prospects

The Zacks Internet – Software & Services industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #203, which places it in the bottom 17% of nearly 250 Zacks classified industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates that the growth prospects are deteriorating. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The aggregate estimate revision trend warrants some caution. That is because the estimates for both fiscal years 2025 and 2026 have moved around quite a bit and have now taken a downward turn. The 2025 estimate was more or less steady through July 2024 before dipping in August. It picked up again through December before dropping back down thereafter. The 2026 estimate was also relatively steady through July, dropping sharply in August and picking up again from October before dropping sharply again this month. Net-net, the 2025 estimate is down 23.7% over the past year while he 2026 estimate is down 21.2%.

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

Industry's Stock Market Performance Is Strong

The Zacks Internet – Software & Services Industry lagged both the broader Zacks Computer and Technology Sector and the S&P 500 through most of 2024, reversing the trend this year.

Overall, the industry returned 20.5% over the past year compared with the broader sector’s return of 11.7% and the S&P 500’s 11.0%.

One-Year Price Performance

Industry Is Somewhat Overvalued

On the basis of forward 12-month price-to-earnings (P/E) ratio, we see that the industry is currently trading at a 24.96X multiple, which is a 15.2% premium to the S&P 500 and a 2.2% discount to the technology sector. Technology stocks usually trade at a higher multiple because investors pay a higher premium for innovation. In this case, it is also worth noting that the industry is trading at its highest multiple over the past year.

The industry has traded in the range of 16.95X to 24.96X and a median level of 19.14X over the past year, as the chart below shows.

Forward 12 Month Price-to-Earnings (P/E) Ratio

2 Stocks Worth Considering

Criteo S.A. (CRTO) : Paris-based Criteo S.A. provides a commerce media platform delivering marketing and monetization services in North and South America, Europe, the Middle East, Africa and Asia-Pacific. Its unified, AI-driven platform directly connects advertisers with retailers and publishers to drive commerce on retailer sites and on the open Internet.

The company’s strategy is to harness AI to expand its reach across audiences, seeking to expand its ecosystem across advertisers, retailers and third-party platforms, using the commerce dataset to feed its AI models.

As advertiser budgets are sensitive to macroeconomic factors like the geopolitical conflicts in Ukraine and the Middle East, as well as things like inflation and interest rates back home, this market hasn’t done exceptionally well in the past year. However, Criteo was able to leverage its Retail Media platform to offset some of this softness.

Despite the loss of a large customer that is expected to hurt results from the fourth quarter of 2025, the company has a depth of offerings to continue to add many more. Existing customer spending soared in the last quarter, with ex-TAC (traffic acquisition costs) same retailer contribution retention at 120%.

As brands and retailers continue to onboard its platform, networking effects kick in, helping results. Its client retention remained close to 90% in the last quarter. Overall Retail Media ex-TAC contribution growth was 18%. Performance media ex-TAC contribution growth was a more sedate 4%, helped by growing strength in its AI-powered commerce solution.

Shares of this Zacks Rank #2 (Buy) company have lost 20.5% over the past year. The Zacks Consensus Estimate for 2025 is down -12 cents (2.7%) in the last 30 days. The 2026 earnings estimate is down -37 cents (7.7%). Analysts expect sales to increase +2.4% this year with earnings declining -3.9%. Earnings are currently expected to grow +0.9% the following year on the back of +2.7% revenue growth.

Price and Consensus: CRTO

RingCentral Inc. (RNG) : Belmont, CA-based RingCentral’s AI-powered product portfolio includes the Unified Communications as a Service (UCaaS), Contact Center as a Service (CCaaS), Video & Events, and RingSense AI solutions. Its success is as much a function of its innovative communications and collaboration solutions as its diverse range of strategic partners, global service providers, channel partners and third-party developers.

The company’s new AI-based solutions are doing extremely well and management has said that in the last quarter, average recurring revenue ARR exceeded $2.5 billion. The newly-launched AI receptionist (AIR) operates as a digital phone assistant, automatically recording key details on calls, including decisions and action items; and generates context aware chat messages in real time, as well as context-based SMS. There are already 1000 activated customers on AIR. Other highlights of the quarter included its integration into the Salesforce CRM ecosystem and big customer wins such as Cox Communications and Altafiber (previously Cincinnati Bell).

Shares of this Zacks Rank #3 (Hold) company have lost 26.5% over the past year. The Zacks Consensus Estimate for 2025 is level with the estimate 30 days ago while the 2026 earnings estimate is down 3 cents. Analysts are looking for revenue growth of 4.6% in 2025 and 5.8% in 2026, with earnings expected to grow a respective 13.5% and 11.2%.

Price and Consensus: RNG

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

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