“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.
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)
“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.”
Here’s where else companies are investing:
- Telephony/Remote Desktop: Investments in remote desktop technologies and telephony systems are normalizing from pandemic expansion, although 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.
“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.”