Working at Home: Technology of Necessity Will Become Permanent

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SEE LAST PAGE OF THIS REPORT Paul Sagawa / Tejas Raut Dessai

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April 6, 2020

Working at Home: Technology of Necessity Will Become Permanent

Before the pandemic, ~40M Americans worked at desk jobs with just 8M of them working from home. We believe social distance policies have more than tripled the work at home segment. Adding to these 20-25M new US remote workers are 5-10M US college students that are now remote learners. Presuming similar circumstances in the rest of the developed world suggests 75M+ new full-time home workers/students. This greatly accelerates a trend toward that had already been underway and has provided an immediate spike in demand for hardware and software to facilitate remote work. Given the pace of change and the impediments to closing complex sales, the big beneficiaries will be off-the-shelf hardware and turnkey SaaS software solutions. We believe that many of these solutions will gain significant scale advantages that will continue beyond the immediate crisis and that remote work will see lasting gains and a steeper long-term trajectory. The opportunities can be categorized in 8 buckets with potential winners in each: hardware, communications, collaboration, productivity, infrastructure, admin, security, and components.

  • “I am out of the office…” About 25% of the 160M person US workforce have jobs that could be done remotely with just 8M already permanently working from home. With half of Americans under government order to remain at home and many others asked to do so by employers (the number is likely to rise significantly before it falls) the number of home workers could more than triple to 25M+. Add in 5-10M college students shifting to distance learning on similar platforms and the growth in US remote workers may have risen 20-30M seats over a few short weeks. Globally, the number will likely top 75M.
  • The pace of change demands turnkey solutions. Enterprise IT has neither the luxury of time nor the physical reach to deploy complex hardware or software for support of the rush of remote workers. Most employees will use their own hardware, but some will choose to upgrade from off the shelf retail inventory. Software will be specified by employers and learning institutions, but available from the cloud. Ease of implementation and use will favor SaaS applications. IT departments will also adopt new software to support their suddenly large remote communities. Self-provisioned turnkey cloud solutions will be favored here as well.
  • Office upgrades. Many newly remote users have chosen to upgrade their equipment, hence the shortages of PCs, peripherals (e.g. monitors, printers, mice, webcams, home speakers, etc.) and networking gear (e.g. WiFi routers) at many computer stores and online retailers. We believe this surge is largely a one-time thing for 1H20, although the larger population of people primarily working from home may accelerate the upgrade cycle for home computing equipment longer term.
  • Communications, collaboration and productivity. Remote workers have special needs. Virtual meetings, distance learning and telemedicine have driven a step-function jump in demand for videoconferencing on web-based platforms, confirmed by market leaders CSCO, ZM, MSFT and GOOGL. The $4B market for these services could more than double in 2020. Similarly, Collaboration software to facilitate group productivity is a hot category made even hotter by the current circumstances. Products from MSFT, WORK, TEAM, LOGM, CTXS, DOCU, Unify, TWUO, PLAN, SMA and others serve an $10B market that is likely to grow 30%+ this year. Finally, productivity software, dominated by MSFT’s Office 365 but including major offerings from GOOGL, ADBE, CRM (Tableau), SPLK, AYX, and others, should get a modest boost in subs from new remote workers.
  • The IT department. We see 3 major priorities for enterprise IT beyond the hardware and software to be used in home offices. First, the IT infrastructure must be able to support the crunch of remote access – datacenter processing, storage, communications, and infrastructure software must be configured and ready. This should accelerate a shift to public cloud resources, such as MSFT Azure, AWS, Google Cloud Platform, AKAM, NET and FSLY, flexible enough to accommodate uncertain demands and easily provisioned. Second, remote work requires administrative support and vigilant work-flow monitoring, likely to be implemented by and for managers who will themselves be working remotely. Again, we see SaaS versions of these functions (e.g. WDAY, PAYC, PCTY, etc.) gaining new traction as a result. Finally, the pandemic is also a cybersecurity nightmare. Cloud hosted tools to manage identity and safeguard against malicious entry from the internet (e.g. OKTA, ZS, CRWD, CYBR, etc.) should see significant new demand
  • Cloud Platforms. Work-at-home (along with consumer cloud applications) is driving extraordinary traffic to hyperscale datacenter operators like AWS, MSFT Azure, and GOOGL Cloud Platform. Under this strain, look for capital spending on capacity to accelerate, bolstering component suppliers like INTC, AMD, NVDA (including MLNX), WDC and STX. Some suppliers, such as AVGO, MRVL, and XLNX, could see datacenter upside offset by weakness in other businesses, such as smartphones or automotive.
  • In the long run. We believe that the emergency move to remote work will have lasting implications as organizations learn to better manage employees out of the office setting and the benefits (e.g. lower costs, greater convenience for workers, etc.) become better appreciated. In this context, the shift toward SaaS applications and public cloud hosting should accelerate while the adoption of administrative and security tools appropriate for a more distributed workforce will continue on a higher trajectory. The specific communications and collaboration tools intrinsic to work-at-home will see growth pull back from the initial boom but should sustain a higher trajectory as 15-20% of those forced to work remotely continue to do so as a significant percentage of their time after the pandemic eases.
  • Our work-at-home top picks. By now, investors have discovered most of the stocks with connection to the work-at-home gold rush. A few – ZM, WORK, and CRWD come to mind – have been bid up significantly, and while high expectations have not yet been reflected by consensus, there may be less room for real surprises. In this context, we break our work-at-home recommended list into five parts: 1. Well positioned bellwethers – MSFT, GOOGL, AMZN and ADBE; 2. SaaS user applications – TEAM, DOCU, and PLAN; 3. Cloud based security – OKTA, ZS, CYBR, PFPT; 4. Enterprise IT tools – WDAY and FSLY; and 5. Datacenter suppliers – NVDA, AMD, and STX

Honey, I’m Home

In less than a month, 10-20M desk workers have been asked to work remotely, joining roughly 8M Americans already working from home. Joining them are more than 10M US college students leaving campus for online classes. All signs suggest that it will be a month or longer before the bell rings to return these employees and students to their seats. Meanwhile this massive rush of remote users must be safely accommodated. Worldwide, there are likely 75M new workers and students operating full time from home.

First step is kitting them out. Many already have computers and have occasionally worked on them from home. Still, empty shelves at PC stores suggest there has been a rush of laptop upgrades, new peripherals and the latest version of WiFi routers. Others may be getting a bit fancy with smart speakers and other connected home gear. This is likely a one-time event, although its impact will follow as the pandemic spreads to new territory.

Second, the home-based workforce will need software and other cloud-based services. Some of it will be for communicating with colleagues – Zoom has been the “It” service of the pandemic, but Microsoft’s Skype, Google’s various video platforms, Cisco’s videoconferencing suite, and Facebook’s messenger are all reporting massive step function growth in usage. Some of it is for collaboration – Slack, Microsoft Teams, Atlassian, DocuSign, Citrix, and others are on fire. Distance learning, powered by the likes of Google, Microsoft, and 2U, is also steaming into new territory. Finally, cloud productivity apps like Microsoft Office, Google Docs, Adobe and many others are accelerating the shift from software licensing.

Enterprises must adjust to operating with their newly dispersed workforces. A big thing is cybersecurity – with remote connections increasing 3 or 4-fold, hackers could easily slip in alongside. Identity management, privileged access controls, and sandboxing through cloud servers should see heavy demand. IT departments will also need infrastructure – both software and hardware – to accommodate their far-flung virtual offices. Again, we see cloud-based versions as much more flexible and cost effective. Finally, old fashioned HR systems are likely to be inadequate to the challenges of managing off-site workers and management would certainly appreciate tools to monitor the productivity of their employees.

Once the signal to return back into the water is sounded, this forced experiment into working from home is likely to have lasting effects, with work and study from home falling back to a much higher level than had been the case prior to the crisis. In this, we expect that the enterprise exodus to the public cloud will be on a new, steeper trajectory, that cybersecurity will focus more sharply on managing user identity and controlling access, that many collaboration tools will be past critical mass and carrying significant organizational momentum, and that consumers will make the configuration of their home office set-ups a higher priority. These circumstances will have knock-on effects for the rest of the TMT landscape, including stimulating faster investment in hyperscale datacenters.

In these chaotic times, we believe that big winners will emerge, even as most enterprises suffer. We break our recommended list into 4 parts: 1. Well positioned bellwethers – MSFT, GOOGL, AMZN and ADBE; 2. SaaS user applications – TEAM, DOCU, and PLAN; 3. Cloud based security – OKTA, ZS, CYBR, PFPT; and 4. Enterprise IT tools – WDAY and FSLY. We also note that the spike in datacenter traffic from remote work will also press platform operators to add capacity, which should be a further driver for suppliers like NVDA, XLNX, INTC, AMD, WDC and STX.

I Will Be Out of the Office …

Before the COVID-19 outbreak, about 8M Americans worked full-time from their homes, most of them working for themselves but some with the agreement of their employers. Another 15M or so report that they work from home at least once a week, while a total of roughly 40M Americans work at desk jobs that could, conceivably, be accomplished remotely (Exhibit 1). With 37 states having forced closure of non-essential workplaces (and other states likely to soon join them) and with many large employers sending their office workers home, the number of full-time remote workers is likely to have more than tripled within a span of a few short weeks. This could be 15-20M additional people.

In addition to workers, about 20M students attend college in the US with 3 million of these enrolled in online-only programs and another 2M taking at least one course remotely. Many if not most of these students’ colleges have also been forced closed by local government social isolation edicts, with a very large number shifting all instruction to virtual online classrooms. These students are also upgrading their laptops and downloading videoconferencing apps and learning platforms designated by their institutions. This likely adds another 5-10 million to the working from home brigade (Exhibit 2).

The US is generally about a third of the global technology market. Presuming a truly global pandemic with similar ramifications for workers abroad, the 20-30M Americans who have just started working and studying from home could be 60-90M on a worldwide basis. This is a huge market springing from nowhere over the course of a few months (Exhibit 3, 4). Someone is making money from this.

Exh 1: Snapshot of Total US Workforce by Nature of Work, 2018 to 2023E

Exh 2: Breakdown of Remote Work Eligible Workforce in the US, 2019

Exh 3: US Remote Workers as a Percentage of Total Workforce and Desk Jobs

Exh 4: SSR Estimate of US Remote Worker Base Size, 2019 – 2023E

So Easy, a Caveman Could Do it

There is no time for normal procurement. No bodies available for implementation, training or support. Employees need to download solutions directly or access them via the internet. Things will be paid for by credit card (save the receipts!). Everything needs to be turnkey, off the shelf and work on the first try.

Hardware? Buy it from the local Best Buy or Staples, unless they are closed, then order it from Amazon. Software will mostly be applications that they already use at work, but downloaded to their home PCs or, better yet, accessed as a cloud-hosted SaaS version. Some apps will be new – web conferencing, collaboration tools, etc. – and all of them will be provisioned for a much larger user base. IT managers will prioritize reliability and ease of use over bells and whistles, and luckily best of breed cloud apps typically deliver, often include better functionality, and sometimes are cheaper on a long-term basis to boot. Behind the scenes, the IT department may also have to change things up a bit – they’ll mostly be working from home too. Again, cloud-based resources – hosting, SaaS management apps, cybersecurity tools – are likely to be favored.

8 Buckets of Work-at-Home Opportunities

With the rush of 60M or more people worldwide suddenly working and studying from home, we see business opportunities that should see substantial new demand. Some of this will be fleeting and some will have long lasting impact for the companies involved. We break the opportunities into 8 areas:

Home Office Hardware – Replace that 3-year-old laptop with a balky trackpad. Change out that WiFi router that barely reaches to your basement home office for a new mesh-based system with a booster right on your desk. Get a big monitor and a webcam for those videoconferences. Add an Amazon Echo to play music and answer questions while you work. These impulses have emptied the shelves at computer stores and the virtual shelves online, and PC and peripheral makers should see an associated demand bump, at least on the consumer side. However, severe disruption of supply chains in Asia will act as a natural speedbump and the jump in demand is likely to recede as workers become more habituated to their home office setups. Longer term, we see modest positive effects as some subset of the emergency work-at-home brigade transitions to a more permanent remote working arrangement with consequent faster upgrade cycle.

Communications – Social distancing wreaks havoc on meetings. Not just the conference room sessions or class lectures but on the ad hoc confabs between colleagues and on pitches to customers. Mundane forms of communications, like virtual telephone systems (e.g. Ring Central, 8×8, etc.) and email systems (e.g. Microsoft Outlook, Gmail, etc.) are getting more play, but this looks like the catalyst that finally makes videoconferencing a big deal. The expensive solutions that required kitting out a special conference room and that have flummoxed meeting organizers for years have given way to cloud-based desktop systems that work the first time you try them. The big players (e.g. Cisco, Microsoft and Google) all report serious spikes in usage, but the platform du jour seems to be Zoom. On the other side of this, video meetings will be a lot more common than they were before it started (Exhibit 5).

Collaboration – Before COVID-19, SaaS collaboration applications were already hot – Slack’s 4Q19 sales were up 49% YoY, Atlassian’s were up 36%, Anaplan was up 38%. The explosion of remote workers means existing users will increase their use, existing enterprise accounts will expand their base of users, and new accounts are quickly coming online. These will be amongst the biggest gainers from the pandemic. Microsoft’s Teams platform, which had been growing its user base at about a 50% annual rate saw its daily active user count jump 37% in just ONE WEEK in March. In addition to the names noted above, DocuSign (electronic signatures), Citrix, Unify, Smart Sheets, and others will benefit. We also note that 2U, which specializes in distance learning platforms for Universities, should also see banner growth (Exhibit 6).

Productivity – The work-at-home phenomenon may not boost sales of productivity software very much – things like office suites, analytics applications, business analytics software, etc. – but it will dramatically change the way it is delivered. Expect cloud-based SaaS versions to prosper as the crisis accelerates an enterprise shift to the cloud that had already been underway. Names like Microsoft, Google, Adobe, Salesforce, Splunk, Alteryx, and others should benefit.

Infrastructure – Not all of the change is on the user side. IT departments, now also mostly working from home, need to assure the availability of the datacenter resources needed to support the newly far-flung workforce. Public cloud hyperscale datacenter operators can provision new capacity and functions in minutes over the web. This flexibility will be vital to strained enterprise IT managers – AWS, Microsoft

Exh 5: Global Video Conferencing Software is expected to nearly double in 2020

Exh 6: Collaboration Software is expected to grow at a 14% CAGR through 2025

Exh 7: Summary of 8 buckets outlining the Work-from-Home opportunity

Azure and Google Cloud Platform should gain new business and increased usage through this. This should also be a boon to content delivery networks, such as Akamai, Cloudflare and Fastly, which can improve performance for remote users by pushing the most accessed data and applications to physically closer facilities. Infrastructure software is also part of this, perhaps hastening a shift to open source databases.

Administration – It will be much harder for managers to keep track of worker productivity and progress against organizational goals, while managing payroll and benefits. We expect cloud-based HR solutions to be a part of the answer. Workday, Paylocity, PayCom and others fall into this category (Exhibit 7, 8).

Cybersecurity – A massive increase in remote access, both in sheer numbers of users and in their frequency of access, is gift-wrapped invitation to hackers and state intelligence to use the confusion as cover to break into enterprise systems. The shift to the cloud will help, as SaaS applications and IaaS hosting platforms typically have state-of-the art cybersecurity tools to help protect data, but keeping track of those millions of newly remote user IDs will be up to enterprise IT. Again, we see cloud-based solutions as key. Okta, which is the leader in identity management, is perfectly positioned here. We also expect companies to make greater use of services that assess all inbound traffic before it hits enterprise systems – players here include ZScaler

Exh 8: Software winners will broadly fall in two distinct categories

and CrowdStrike. Finally, sandboxing – extra security around the most crucial data assets and scrutiny of privileged user accounts – is also likely to gain traction. We like CyberArk in this category.

Components – All of this new cloud activity will strain the capacity of the hyperscale datacenters that host them. We had already expected 2020 to be a banner year for server chips, specialized processors for AI acceleration, disc drives and other piece parts of modern datacenter architecture. This will be a further boon for Intel, AMD, Nvidia, Xilinx, Western Digital, Seagate and others.

After the Goldrush

At some point, governments will begin sounding the “all clear” signal and workers will begin returning to their desks. However, some of the approaches adopted during the crisis will have long-lasting effects on the TMT landscape (Exhibit 9, 10, 11).

  1. Some portion of those employees sheltering-in-place will find benefits in the work-at-home arrangement (e.g. no commute, time flexibility, presence for childcare, etc.) and will remain working remotely, at least part-time. These users will likely upgrade their hardware more frequently and will continue with the communications and collaboration tools they used during isolation.
  2. Cloud applications adopted on the fly will find broader use across organizations, accelerating the adoption trajectory that they were on prior to the pandemic (Exhibit 12). This will be particularly true of collaboration applications but recognizing the flexibility and cost benefits of cloud-based productivity, analytics, HR, and other solutions should also drive growth there as well.
  3. The general transition from private datacenter to the public cloud will have new momentum, particularly with the possibility of a second wave of infections in the fall. Enterprises will have to make decisions about their future IT architecture and the transition to it – potentially providing

Exh 9: Effects of Work-from-Home will linger long after the lockdown ends

Exh 10: Shift to remote work opens gap for new software platforms and services

Exh 11: Highlight of departments with greatest remote-work representations pre-pandemic

  1. more impetus for hybrid cloud approaches in the intermediate term. It also means that hyperscale platforms will need to step up investment in capacity.
  2. Cloud-based security approaches will become prevalent, shifting the emphasis from managing device endpoints toward managing user identity and scrutinizing traffic. Security concerns will also support the enterprise shift into the cloud.

We also believe that these shifts will spell significant weakness for spending on private datacenters and on packaged software.

Who Do We Like?

Weeks into this crisis, many of the most obvious beneficiaries of work-at-home have already become consensus longs. Stocks like Zoom, Slack and CrowdStrike have already massively outperformed and carry lofty expectations to match, even if these are not yet reflected in the consensus buyside numbers. It may be

Exh 12: Avg. top-line surprises posted by SaaS tools facilitating remote-work shift

Exh 13: Comparison of key valuation metrics for SaaS companies in Remote Work

Exh 14: Snapshot of Financial Metrics for Winners from Work-from-Home Shift

a tad “too late” for these names (Exhibit 13). We suspect that huge number in the next report may not drive these stocks much higher in the near term, although we believe that all three are positioned to deliver long-run results that will eventually make the current share prices worthwhile. Still, we see other names that may deliver better near-term performance. We break our favored list into 5 groups (Exhibit 14):

  1. Bellwethers – Microsoft, Google, Amazon and Adobe. Microsoft and Amazon have been stalwarts through the crisis and almost fall into the category of “too late” but these stocks ~$1T market caps demand that investors make a call one way or the other. Google is more controversial, but we believe that advertising will be early to rebound out of the recession and that its enterprise business is making meaningful competitive progress through this. Finally, Adobe is well off its highs but well positioned to weather the storm.
  2. SaaS Apps – Atlassian, DocuSign and Anaplan. All three are high growth cloud names well placed for the work-from-home boom but not quite as bid up as some others.
  3. Cloud Security – Okta, ZScaler, and CyberArk. We think the cybersecurity risks inherent in the unplanned and massive expansion of remote work have been underplayed in the business press. These stocks are all very well placed to accelerate their already considerable growth during the pandemic.
  4. Enterprise Solutions – Workday and Fastly. There are a few names that could play in this category. We like Workday and its HR focus should give it new potential in this environment. Fastly is the smallest and fastest growing of the independent CDNs. Its usage-based pricing suggests big upside from social distancing.
  5. Datacenter Components – Nvidia, Intel, AMD and STX. We expect a LOT of spending on datacenters in this environment. These are the purest plays on that (Exhibit 15).

Exh 15: Summary of Winners of Work-from-Home Shift

 

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