Wall Street market participants have turned optimistic about interest rate cuts by the Fed following the recently released soft economic readings. The CME FedWatch tool currently shows a 100% probability of a Fed fund rate cut by 25 basis points in September. This probability was around 68% in early July.
Moreover, the interest rate derivative tool also shows a 48.5% probability of a 50 basis-point rate cut in September. The central bank has currently kept the benchmark lending rate at its 23-year high in the range of 5.25-5.5%.
A lower interest rate regime will benefit growth sectors like technology. The ongoing astonishing rally of U.S. stock markets from the beginning of 2023 to the third week of July 2024 was predominantly driven by the technology sector.
This was led by a massive thrust toward artificial intelligence (AI), especially generative AI. Consequently, the major gainers were technology giants. Some of these stocks have flourished 100-400% in the past one and a half years. Aside from technology behemoths, several mid-cap (market capital > $5 billion < $10 billion) Internet software stocks are set to benefit in the near future after the market rout of early August.
Internet Software Industry
The Internet Software and Services space is gathering momentum owing to robust IT spending on solutions that support hybrid operating environments. The level of technology adoption by businesses and the proliferation of connected consumer devices, which might help people connect and do business online, is also accelerating the industry’s growth. Outstanding penetration of mobile devices among users, makes sense for businesses to invest heavily in web-based infrastructure, applications, and security software.
The Internet software industry is benefiting from continued demand for a global digital transformation. Growth prospects are alluring primarily due to the rapid adoption of Software as a Service (SaaS), which offers flexible and cost-effective delivery of applications.
SaaS attempts to deliver applications to any user, anywhere, anytime and on any device. It has been effective in addressing customer expectations of seamless communications across multiple channels, including voice, chat, email, web, social media and mobile.
The growing need to secure cloud platforms amid rampant incidences of cyber-attacks and hacking is driving demand for web-based cybersecurity software. As enterprises continue to move their on-premise workload to cloud environments, application and infrastructure monitoring is gaining importance. This is increasing the demand for web-based performance management monitoring tools.
Moreover, the pay-as-you-go model helps Internet software providers scale their offerings per the needs of different users. The subscription-based business model ensures recurring revenues for the industry participants.
Our Top Picks
We have narrowed our search to three mid-cap Internet software stocks with strong potential for the rest of 2024. These stocks have seen positive earnings estimate revisions in the last 60 days. Each of our picks carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Twilio Inc. (TWLO - Free Report) is benefiting from accelerated digital transformations amid a growing hybrid working trend. TWLO’s selective acquisitions and strategic investments in businesses and technologies are enhancing its product portfolio and fortifying its global presence.
TWLO is gaining not only traction from a solid expansion of its existing clientele but also first-time deals with new customers due to its firm focus on introducing products and a go-to-market sales strategy. TWLO’s ongoing cost-saving initiatives are driving profits and margins, which is praiseworthy.
Twilio has an expected revenue and earnings growth rate of 5.3% and 37.1%, respectively, for the current year. The Zacks Consensus Estimate for the current-quarter, next-quarter, current-year and next-year earnings have improved in the last 30 days. The average price target of brokerage firms represents an increase of 16.9% from the last closing price of $60.41. The brokerage target price is currently in the range of $55-$110.
Image Source: Zacks Investment Research
Dayforce Inc. (DAY - Free Report) operates as a human capital management (HCM) software company in the United States, Canada, and internationally. DAY offers Dayforce, a cloud HCM platform that provides human resources, payroll and tax, workforce management, wallet, benefits, and talent intelligence functionalities, and Powerpay, a cloud HR and payroll solution for the small business market. DAY also provides payroll and payroll-related services, and implementation and professional services. DAY sells its solutions through direct sales force and third-party channels.
Dayforce has an expected revenue and earnings growth rate of 15.2% and 21.9%, respectively, for the current year. The Zacks Consensus Estimate for current-quarter, next-quarter, current-year and next-year earnings has improved in the last 30 days. The average price target of brokerage firms represents an increase of 30.3% from the last closing price of $53.06. The brokerage target price is currently in the range of $55-$870.
Image Source: Zacks Investment Research
AppFolio Inc. (APPF - Free Report) provides cloud business management solutions for the real estate industry in the United States. APPF provides a cloud-based platform that enables users to automate and optimize common workflows, and tools that assist in leasing, maintenance, accounting, and other technology and services offered by third parties.
APPF also provides value-added services that are designed to enhance, automate, and streamline processes and workflows for property management businesses, such as electronic payment, tenant screening, and insurance services.
AppFolio has an expected revenue and earnings growth rate of 25.4% and more than 100%, respectively, for the current year. The Zacks Consensus Estimate for current-quarter, current-year and next-year earnings have improved in the last 30 days. The average price target of brokerage firms represents an increase of 32% from the last closing price of $213.92. The brokerage target price is currently in the range of $235-$328.
Image Source: Zacks Investment Research
