The technology sector is seeing a dream run in 2023 after a highly disappointing 2022. Year to date, out of the 11 broad sectors of the S&P 500 Index, the Technology Select SPDR (XLK) is the largest gainer, jumping 43.6%. Its close resemblance — the Communication Services Select Sector SPDR (XLC) — has also surged 43.3%. Moreover, the tech-heavy Nasdaq Composite has rallied 36.5% year to date.

Within the technology sector, the Zacks Defined Internet-Software Industry is currently placed in the top 25% of all industries with a year-to-date return of 61.5%. 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 the demand for web-based cyber security software. As enterprises continue to move their on-premise workload to cloud environments, application and infrastructure monitoring is gaining importance. This is increasing 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.

At this stage, it will be prudent to invest in Internet software stocks with a favorable Zacks Rank to strengthen one’s portfolio.

Our Top Picks

We have narrowed our search to five Internet software stocks with strong potential for the rest of 2023. These stocks have seen positive earnings estimate revisions in the last 30 days. Each of our picks carries a Zacks Rank #1 (Strong Buy).

CrowdStrike Holdings Inc. CRWD is benefiting from the rising demand for cyber-security solutions owing to the slew of data breaches and the increasing necessity for security and networking products amid the growing hybrid working trend. Continued digital transformation and cloud-migration strategies adopted by organizations are the key growth drivers.

CRWD’s portfolio strength, mainly the Falcon platform’s 10 cloud modules, boosts its competitive edge and helps add users. Additionally, strategic acquisitions, like that of Humio and Preempt, are expected to drive growth for CRWD.

CrowdStrike has an expected revenue and earnings growth rate of 35.3% and 55.2%, respectively, for the current year (ending January 2024). The Zacks Consensus Estimate for current-year earnings has improved 0.4% over the last 60 days.

Fortinet Inc. FTNT is benefiting from rising demand for security and networking products amid the coronavirus crisis as a huge global workforce is working remotely. FTNT is also benefiting from robust growth in Fortinet Security Fabric, cloud and Software-defined Wide Area Network offerings.

Moreover, continued deal wins, especially those of high value, are solid drivers. Higher IT spending on cybersecurity is expected to aid Fortinet in growing faster than the security market. Also, focus on enhancing its unified threat management portfolio through product development and acquisitions is a tailwind for FTNT.

Fortinet has an expected revenue and earnings growth rate of 23.6% and 22.7%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 3.5% over the last seven days.

Palo Alto Networks Inc. PANW has been benefiting from continuous deal wins and the increasing adoption of PANW’s next-generation security platforms, attributable to the rise in the remote work environment and the need for stronger security.

Palo Alto Networks has an expected revenue and earnings growth rate of 25.4% and 9.5%, respectively, for the current year (ending July 2024). The Zacks Consensus Estimate for current-year earnings has improved 0.9% over the last 60 days.

Workday Inc.’s WDAY revenue growth continues to be driven by high demand for its HCM and financial management solutions. WDAY’s cloud-based business model and expanding product portfolio have been the primary growth drivers.

Strong emphasis on the integration of generative AI in WDAY’s products and developing various AI-driven applications to drive more value is a tailwind. Partnership expansion with Alight to deliver an integrated payroll experience to customers across Europe will likely strengthen its global footprint. In addition, Workday is expanding its portfolio beyond core HCM solutions into the financial domain.

Workday has an expected revenue and earnings growth rate of 15.4% and 45.3%, respectively, for the current year (ending July 2024). The Zacks Consensus Estimate for current-year earnings has improved 0.8% over the last 60 days.

StoneCo Ltd. STNE provides financial technology and software solutions to merchants and integrated partners to conduct electronic commerce across in-store, online, and mobile channels in Brazil. STNE distributes its solutions, principally through proprietary Stone Hubs, which offer hyper-local sales and services, and sells solutions to brick-and-mortar and digital merchants.

StoneCo has an expected revenue and earnings growth rate of 4.4% and more than 100%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 1.4% over the last 60 days.

Fortinet, Inc. (FTNT): Free Stock Analysis Report

Palo Alto Networks, Inc. (PANW): Free Stock Analysis Report

Workday, Inc. (WDAY): Free Stock Analysis Report

StoneCo Ltd. (STNE): Free Stock Analysis Report

CrowdStrike (CRWD): Free Stock Analysis Report

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