Zacks Industry Outlook Highlights Okta and Globant

Zacks Equity Research
9 min read

In This Article:

For Immediate Release

Chicago, IL – October 16, 2024 – Today, Zacks Equity Research discusses Okta, Inc. OKTA and Globant S.A. GLOB.

Industry: Software and Services

Link: https://www.zacks.com/commentary/2350434/2-software-services-stocks-with-strong-growth-prospects

The outlook for the Internet-Software & Services industry reflects a slowing economy. The industry is highly correlated to the economy and estimates have been coming down over the past year, as concerns over an economic slowdown continued to grow. We are also seeing industry revenue and EBIT flatlining year on year with available cash also appearing to be under some pressure.

In this background, companies like those listed below are shining through for a number of reasons. First, they have adopted a subscription model, thus enhancing the predictability and stability of performance. Second, they are leveraging AI, which will help offset the ongoing economic weakness. 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 come down in recent months.

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.

Top Themes Driving the Industry

  • The level of technology adoption by businesses impacts growth. While some companies have already built their platforms, facilitating the development and use of artificial intelligence, others are scrambling to catch up in order to stay competitive. This is further accelerating the adoption of technology that can help collect and analyze data, whether on premise or in the cloud. Additionally, today we have many more cloud-first companies than ever before. Therefore, there is steadily increasing demand for software and services delivered through the Internet.

  • Despite recent rate cuts, the economy continues to slow down, which isn't good news for an industry thatthrives on a strong economy. No matter what the other variables – and there are many considering the motley crowd that makes up this group – an economic slowdown always leads customers to make do with less, i.e. buy less software. Additionally, the geopolitical tensions in Europe have a bearing on oil prices and supply chains, and therefore, contribute to the volatility and uncertainty within the economy. This means that the outlook for 2024 is still a bit cloudy.

  • Given the colorful international politics and the resultant volatility in international markets, there is a notable impact on company performance. The fact that they also serve a very broad spectrum of markets also makes it difficult to predict specific outcomes for the group, as a whole. Therefore, players increasingly prefer a subscription-based model, which brings relative stability to their businesses, especially when the companies have critical offerings. The ability to retain subscribers and raise prices as necessary is proving to be the key to success in the current environment.

  • The higher volume of business being operated through the cloud and the increasing demand for enabling software and services involves infrastructure buildout, which increases costs for players. This causes great fluctuations in profitability as new infrastructure is depreciated and fresh debt is serviced. So even for those players that see revenue growth accelerate, profitability is often a challenge.

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