TL;DR — Virtual desktops (Citrix, VMWare) and Platform Vendors (Palo Alto Networks, Fortinet) look like attractive plays
Imagine you’re driving a car and all of a sudden, you’ve taken your foot off the gas pedal. The car continues to coast before coming to a stop. Using this hypothetical example, the car is the worldwide spending on enterprise software and it looks like the driver (the CFOs / IT departments that purchase this software) is taking their foot off the gas pedal in light of the impact of COVID-19.
Based on how enterprise software spending performed during the previous two downturns, here is how I foresee it playing out this time around:
The car is driving at 60 MPH (Feb 2020)
CFOs / IT departments are purchasing enterprise software as per usual.
The driver takes their foot off the pedal (Mar 2020-Apr 2020)
CFOs / IT departments put new purchase orders of enterprise software on hold, as they try to figure out what the true impact of COVID-19 will be. The only new projects that get funding are critical to conducting business, which in this case, is work-from-home (WFH) projects. The car continues to coast, so existing projects that are currently in the pipeline continue their movement into the next stage…for now.
Virtual Desktops (Citrix, VMWare) — For a lot of companies, you need a virtual desktop to work from home. How else are you going to access your work computer?
Cloud Security Companies (ZScaler) — Since workers are working from home, they’ll likely need a VPN to get access to the company network. However, it should be noted that their customers (which are companies themselves) are likely laying off employees, so if pricing is based on the number of customer employees (seats), cloud security companies might be collecting less revenue per customer.
Single-Sign On Companies (Okta, Ping Identity) —More users are logging in from home, so you’ll need to give them a way to sign on to the different company apps quickly.
The driver pulls over on the side of the road
These newly implemented work-from-home projects cause some issues, especially given that it’s the first time that a lot of these companies are implementing them at scale. As a result, the IT departments of many companies scramble to fix the problems created by these new work-from-home solutions.
The driver talks to the passengers in the car (the other leaders within the company) to talk about the new realities of the COVID-19 world, and discuss which software they should continue to buy, and which they shouldn’t.
We Need This — Infrastructure upgrades to support work-from-home, and mission-critical applications that support the digital transformation of the company
We Don’t Need This — Non-mission-critical software, including internal applications, applications built by outside contractors and rewrites of software that is already working
The gang decides to start driving again
Eventually, the driver and the passengers decide to start driving again, and to do so, they have to put a plan in place on where they’re going.
The people in the car will likely decide not to go as fast as before (e.g. maybe they’ll go 40 MPH instead of 60 MPH). In other words, they decide that they’ll spend 1.5% of the company’s revenue on enterprise software instead of 3.0%. In order to achieve this reduction in spending, the company will have to:
(a) eliminate unnecessary new projects
(b) fire contractors and employees
(c) reduce the number of software companies (vendors) that they buy from
Platform Vendors (Palo Alto Networks, Fortinet, Checkpoint Software) — In order to save costs, companies will try to minimize the amount of software vendors they are buying from (they are trying to lower their TCO, or total cost of ownership). Not only does this save actual software costs, but it saves people costs too because with fewer software vendors, it’ll take up less IT time. Palo Alto Networks will benefit the most from larger enterprises, and Fortinet will stand to gain the most from small and medium businesses.
- Virtual Desktop companies (Citrix, VMWare) — I think the virtual desktop trend will continue as companies begin to prepare for future business interruptions (including pandemics). Spending here should continue to increase.
- Platform Vendors (Palo Alto Networks, Fortinet) — If a real slowdown does occur, I would expect IT departments to start investing in platform vendors as they try to lower their total IT costs.
I would be careful about investing in next-generation solutions (both next-generation firewall companies and next-generation endpoint companies). While they should get a temporary benefit from the amount of vendor switching decisions going on right now (which tends to benefit newer vendors), these decisions are ultimately getting pulled forward. In other words, a decision on a vendor that was supposed to happen in September is happening in March instead.
I would also expect more security breaches as a result of the transition to work-from-home. I’m not totally sure which companies would stand to benefit the most here, but there should be some tailwinds here for some security companies.
The above thoughts reflect my own investment ideas and do not reflect those of my employer.