Internet Software & Services: Criteo Topper, NetEase Still Strong

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. However, the economy remained relatively steady despite incremental caution on the labor market.

The stronger dollar and U.S. production is keeping oil prices low, thus encouraging spending by consumers and others. Dividends are common, having increased in aggregate from around 10 cents to over 35 cents in the last five years, which supports share prices and makes this an attractive segment for investors, especially those looking for additional income.
 
With this background, companies like Criteo (CRTO) 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 very successfully leveraging AI in operations.
 
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 group 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 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 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.

 

• The US economy appears to be doing better than was previously anticipated despite tensions about slowing job growth and increasing unemployment. Some segments like consumer staples generally hold up better during times of slowing economic growth. Other than that, the insurance sector has also navigated this market well. One segment that continues to grow exponentially is artificial intelligence, or AI, as companies across sectors scramble to upgrade their infrastructure in order to stay competitive, and relevant. The resilience of the economy is 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 expenditure on software and services. Additionally, the 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. With the dollar gathering strength and U.S. oil production increasing, oil prices remain depressed, encouraging consumer spending. However, prospects for 2025 remain a bit cloudy, as Russia Ukraine peace talks are not making headway.

 

• 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. Innovation is very important, but not enough to drive growth. 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. 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 #42, which places it in the top 17% 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. So although the estimates for fiscal year 2025 have averaged a decline of 3.7%, those for 2026 are up 4.6% over the past year. Estimates for both years have moved around quite a bit, with April, May and September being the weakest months.

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 33% over the past year compared with the broader sector’s return of 27.6% and the S&P 500’s 16.3%.

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 223.7X, slightly above its median level of 23.29X, which is a 0.4% premium to the S&P 500 and a 17.4% discount to the technology sector. Technology stocks usually trade at a higher multiple because investors pay a higher premium for innovation. Therefore, in this case, indications are that the shares in this industry are not overvalued on average and that there may be some attractive ones to pursue.

The industry has traded in the range of 19.14X to 29.76X 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

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 the 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, the last quarter was relatively stable with some categories like office supplies, furniture and personal care seeing increased year-over-year back-to-school advertising spend. Its client retention remained close to 90% in the last quarter.

Overall Retail Media ex-TAC contribution growth was 11%, with adoption expanding across 4,100 brands. New retail partners include DoorDash, Sephora, The Fragrance Shop, Zepto, Migros, Interdiscount and Massmart.

The company announced a partnership with Google Search, which will go into effect in the current quarter. The deal makes Criteo the first third-party partner to provide retail media inventory in the Americas. The integration with Google’s platform will allow advertisers to manage campaigns across Criteo’s network through Google Search Ads 360. This opens up an estimated $172 billion in addressable spend, a portion of which will be reflected in its Retail Media performance over time. Data, AI and global reach are what advertisers look for in an ad tech provider, and the company is growing its capability on all fronts.

Performance media ex-TAC contribution growth was a more sedate 5%, helped by growing strength in GO!, its AI-powered commerce solution. GO! automates the campaign creation process, optimizing display ad campaigns for both customer acquisition and for re-engaging existing customers. It is primarily targeted at small and medium sized businesses. Management says that 25% of campaigns from its small clients now run through GO!, compared with 10% in the last quarter. This number is expected to double by year-end.

Shares of this Zacks Rank #1 (Strong Buy) company have lost 53.5% over the past year. The Zacks Consensus Estimate for 2025 is up 25 cents (5.6%) in the last 30 days. The 2026 earnings estimate is up 21 cents (4.7%). Analysts expect sales to increase 4.5% this year with earnings growing 2.6%. Earnings are currently expected to grow 0.4% the following year on the back of 2.4% revenue growth.

Price and Consensus: CRTO

Image Source: Zacks Investment Research

NetEase, Inc. (NTES): Hangzhou-based NetEase provides online services based 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.

Gaming is its primary growth engine and the largest contributor to revenue by far. 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.

Some of the popular titles in the last quarter included Fantasy Westward Journey mobile game, Identity V, Eggy Party, Sword of Justice and Where Winds Meet. for instance, its Identity V, Where Winds Meet, Marvel Rivalsit 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. New games included Destiny: Rising, ANANTA and Sword of Justice were some of the popular new titles. Sea of Remnants is in the pipeline and expected to launch next year. Management noted “healthy growth in China and rising global appeal.”

Shares of this Zacks Rank #2 (Buy) company have gained 59% over the past year. NetEase’s earnings for the June quarter were just short of the Zacks Consensus Estimate with revenues missing by around 3%. The Zacks Consensus Estimate for 2025 has increased 6 cents to $8.61 in the last 60 days while that for 2026 has increased 26 cents to $9.30. Analysts currently expect 2025 revenue and earnings to grow a respective 10% and 21.3%. Estimates for the following year are currently expected to grow 7.7% and 8%.

Price and Consensus: NTES

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

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