Even as employees return to the workplace, companies are still investing in cybersecurity, video-conferencing systems and virtual-desktop programs to enable hybrid and remote working models.
Most investors know that the growth of software companies associated with work-from-home trends during the pandemic was likely too hot not to cool down eventually. Now, with more workers heading back to the office, market sentiment for these platforms has dimmed significantly. But with many workers still logging in remotely, and the hybrid model becoming the norm, companies are still investing in video conferencing, telephony technology and cybersecurity architecture. Further, they are likely to maintain more than one provider, especially for communication services, according to Morgan Stanley Research and findings from a recent survey of 65 chief information officers (CIOs) in the U.S. and Europe by AlphaWise, the proprietary survey and data arm of Morgan Stanley.
“While the sector may no longer have the allure of accelerating growth, we do think there is too much negativity on the degree to which the opportunity has been captured,” says Meta Marshall, a Morgan Stanley Research equity analyst covering telecom, networking equipment and communication software.
The onset of the COVID-19 pandemic and resulting lockdowns forced millions of people to remote work overnight. CIOs just as quickly had to ensure essential functions could continue without disruption in virtual settings, pushing up valuations for technologies and systems that were viewed as central to the shift. In fact, the value of companies providing collaboration software and other work-from-home technologies rose 263% in 2020.
But as of mid-June, the valuation of companies in the sector had fallen 49% on average since the beginning of 2022, with most investors thinking that the moment for collaboration software has passed and that companies will focus on one dominant player to manage video conferencing, messaging, telephony and remote desktops.
Collaboration software values had returned to pre-COVID levels after trading nearly three times current valuations in 2020. (All performance figures as of June 17, 2022)
While 75% of respondents in the CIO AlphaWise Survey reported using a single service for video conferencing and 69% rely solely on that suite’s messaging services, Morgan Stanley thinks there is room for competition that the broader market isn’t taking into consideration. The majority of respondents, 72%, also pay for another video-conferencing software that gained ubiquity during the pandemic, and 56% said they plan to maintain at least two different video platforms given differing needs and preferences. Additionally, 40% of respondents enhanced their contracts with more licenses and features compared with 25% that scaled back their agreements.
“Given the return on investment of video, particularly versus in-person travel, we think this dynamic continues,” says Marshall. “Particularly in a more challenged macro environment, it’s a priority to honor customers’ preferences for interaction platforms.”
Companies are not only using multiple video-conferencing and messaging platforms; they are also planning to spend in related areas. Morgan Stanley sees this as an indication that the market could be undervaluing the investment opportunity created by the potential of collaboration technologies and the longevity of hybrid and work-from-home models.
Here’s where else companies are investing:
- Telephony/remote desktop: Investments in remote desktop technologies and telephony systems are normalizing from pandemic expansion, though both areas are poised for incremental growth. When it comes to telephony, 51% of respondents to the AlphaWise survey indicated they had upgraded their systems within the past two years, with 55% adopting a business phone solution that is fully or partially in the cloud. “We think this points to a long runway of cloud adoption still ahead and that demand hasn’t pulled forward as much as is believed today,” says Marshall. Meanwhile, within the employee workforce covered by the AlphaWise survey, the proportion that was enabled to use virtual desktops rose 25% since the onset of the pandemic to 67% and is set to rise to 78% in the next one to two years.
- Cybersecurity: Security has been top of mind for CIOs during the pandemic, especially with a workforce that could be logging in from all corners of the world. Many have made significant investment in firewalls over the past couple of years, the survey showed, with 80% of respondents saying they had upgraded in the last three months. Still, the refresh cycle for firewalls is only about three years, and Morgan Stanley expects continued security investment driven by a more distributed workforce.
“A normalization in growth does not mean investment cycles have ended,” says Marshall. “Barring a major economic downturn, we still expect most WFH-related spending categories to grow over the next few years."
For more Morgan Stanley Research on the outlook for collaboration software and tools, contact Morgan Stanley representative or Financial Advisor for the full report, “Can WFH Plays RTW (Return to Work)?” (June 27, 2022). Morgan Stanley Research clients can access the report directly here. Plus more Ideas from Morgan Stanley’s thought leaders.