Globant & NetEase Driving Software & Services Strength

The Internet-Software & Services industry is highly correlated to the economy; consequently, estimates initially moved down in anticipation of the negative impact of tariffs, inflation and interest rate decisions that typically increase economic uncertainty. The industry appears to be in enjoying operating leverage, which is improving margins as revenue picked back up in the last quarter, along with capital investments.
 
In this background, companies like Globant (GLOB) and NetEase (NTES) are standing out for a number of reasons. First, they are global operations with their revenue (and risk) spread out across the world. Second, while not immune to macro concerns, they have developed systems of client retention through subscriptions and platforms. Third, they are both leveraging AI in operations and in Globant’s case, also helping customers achieve their AI roadmaps.
 
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 a lot making the industry quite attractive at these levels.

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 interactions with the 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 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 premises 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.

• The US economy continues to slow down even as interest rates are held steady, which isn’t good news for an industry that thrives 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. reduce expenditures on software and services. Additionally, geopolitical tensions in Europe and the Middle East have a bearing on oil prices and supply chains, and therefore contribute to the volatility and uncertainty within the economy. The decision of the government to first impose tariffs and then alleviate them, along with its trading partners’ retaliatory tariffs, adds further complexity to the operating environment. This means that the outlook for 2025 is a bit cloudy.

• Given the colorful international politics and the resultant volatility in international markets, there is notable impact on the performance of each player. 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. Players increasingly prefer a subscription-based model, which brings relative stability to their businesses. This works especially well 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 businesses 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 which see revenue growth accelerate, profitability is often a challenge. That said, most of the companies in this industry have been working down debt over the last few years with a positive impact on results. The operating leverage built up in prior years is contributing to profitability today.

Zacks Industry Rank Indicates Improving Prospects

The Zacks Internet – Software & Services industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #100, which places it in the top 41% of nearly 245 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 improving. 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 reflects an improving situation. That is because, despite some ups and downs over the past year, the estimates for both fiscal years 2025 and 2026 are showing a net improvement. The 2025 estimate dropped between January and April before moving up again. The 2026 estimate dipped in May before shooting back up in the following month. Overall, the 2025 estimate is up 7.8% over the past year while the 2026 estimate is up 15.5%.

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 has traded at a premium to both the broader Zacks Computer and Technology Sector and the S&P 500 since the beginning of 2025.

Overall, the industry returned 41.8% over the past year, compared with the broader sector’s return of 29% and the S&P 500’s 20.3%.

One-Year Price Performance

Image Source: Zacks Investment Research

 

Industry's Valuation Is Attractive

On the basis of forward 12-month price-to-earnings (P/E) ratio, we see that the industry is currently trading at its median level of 22.15X, which is a 2.4% discount to the S&P 500 and a 21.3% 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 appears that valuations have come down considerably of late, making the industry quite attractive.

The industry has traded in the range of 17.47X to 24.19X over the past year, as the chart below shows.

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

Image Source: Zacks Investment Research

2 Stocks Worth Considering

Globant S.A. (GLOB): Globant is a technology services provider with global operations. It provides a broad range of solutions including some combination of software and services spanning digital, enterprise technology, ecommerce, AI and other solutions and services directly, as well as through collaborations with AWS, Google Cloud, Microsoft, Oracle, SalesForce, SAP and ServiceNow technology solutions. Its focus industries include banks, financial services and insurance; consumer, retail and manufacturing; travel and hospitality, professional services; technology and telecommunications; healthcare; and others. Globant is headquartered in Luxembourg.

Globant’s works with some of the leading brands in the world including American Express, Santander, Google, EA, LinkedIn, Petrobas, Johnson&Johnson, British Airways, Embraer, Royal Caribbean, Ferrari, FIFA, Warner Brothers, Disney, Puma, Adidas, Loreal and many more. It serves its elite client base through domain specific Studio networks.

The corporate world is speedily moving from mere digitization to AI adoption and Globant is one of the most comprehensive providers across the spectrum. Its current focus on AI-related opportunities through its industry-specialized AI Studios, powered by AI Pods and the Globant Enterprise AI agentic innovation platform is reaping the desired results. IDC expects that by 2028, generative AI will have reached a five-year CAGR of 73.5% while Gartner expects that nearly half of the $7.4 trillion in IT spending by that year will be on software and services. Clearly, Globant is in the industry sweet spot. The fact that its offerings are delivered through a subscription model is a bonus, because it leads to relatively steady inflows that allow it to bypass, to an extent, the macroeconomic and geopolitical gyrations.

Globant has recorded very impressive growth in the last 10 years. While its revenues went from a 28.3% CAGR from 2014 to 2024, customer concentration improved significantly (top ten contributed 44% in 2014 versus 29% in 2024). This was achieved while growing average revenue per client by 23.2% for the top 10 and 23% for the top 20.

Clients contributing more than a million dollars jumped from 46 in 2014 to 341 in 2024. It therefore remains on track to achieve its 100-squared strategy, i.e. 100 customer accounts with $100 million plus revenue potential. Management intends to diversify its workforce, grow the sales team and make strategic tuck-in acquisitions as necessary in furtherance of these goals.

In the last-reported quarter, Globant missed the Zacks Consensus estimate by 5.7% on revenue that missed by 1.8%. The company grew revenues 7% from the year-ago quarter, but slower spending in lieu of macroeconomic uncertainty weighed on results. In this environment, management focus is on driving margins, cash flow and shareholder returns.

Shares of this Zacks Rank #2 (Buy) company are down 59.7% over the past year. In the last 30 days, its 2025 estimate has increased by a penny while the 2026 estimate dropped by a like amount. Analysts currently expect earnings to decline 4.1% this year on revenue that’s expected to grow 2.4%. In 2026, revenue and earnings are expected to grow a respective 5.9% and 6.7%.

Price and Consensus: GLOB

Image Source: Zacks Investment Research

NetEase, Inc. (NTES): Hangzhou-based NetEase provides online services focusing on diverse content, including games, music, other services and education (dictionary, translation and including a range of smart devices) in China. Its products and services are focused on community, communication and commerce, infusing play with culture, and education with technology.

NetEase has one of the largest in-house R&D teams in gaming with a very broad focus across mobile, PC and console channels. This is generating tremendous momentum in its business right now. In the last quarter for instance, its Identity V, Where Winds Meet, Marvel Rivals and several other newly launched titles did very well. The strength in gaming, its largest segment by far, offset softness in other segments where the company is pursuing more profitable business. Fresh content is also driving its international business.

Shares of this Zacks Rank #2 (Buy) company have gained 43.8% over the past year. NetEase’s earnings for the March quarter came in 23.5% ahead of the Zacks Consensus Estimate with revenues also beating by 2.8%. The Zacks Consensus Estimate for 2025 has increased a couple of cents to $8.53 in the last 30 days while that for 2026 has increased 5 cents to $8.97. Analysts currently expect current year revenue and earnings to grow a respective 8.7% and 20.1%. Estimates for the following year are currently expected to grow 6.1% and 5.2%.

Price and Consensus: NTES

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

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