So that hypothesis goes like this:
The lockdowns induced by the coronavirus pandemic is increasing the need for people and corporations (and their employees) to work from home. They need to work from home and still be productive while protecting the companies’ family jewels. Thus, this situation will help companies that provide essential products and services that help people and corporations meet the above objectives. Thus, the digital transformation that is one of the largest transitions in the history of the enterprise and was already well underway, is now accelerating even faster. Now those companies that do not quickly digitally transform will now have their competitive advantage erode away even faster than their competitors that are digitally transformed. So companies that offer products and service to enable business to operate remotely, safely, and electronically will see demand increase more than it would have in the absence of the pandemic.
The above is the hypothesis. Yet, there is still some angst among investors because what if it’s not true? What if companies would love to transform, but, now that times are so tough, will the companies tighten their belts and spend less on the transformation? As shareholders in SaaS companies, the answer to this question (will they spend more, less, or the same) is very important because it could lead us to some investment decisions that can help boost our returns. The SaaS companies will begin reporting their Q1 results soon. It would be nice to know how strong those results might be. I have done my thinking and analyzing and I have thoughts/predictions on which companies will report results that 1) are a continuation of part quarters’ performance, 2) are an acceleration of recent past quarters’ performance, or 3) are a deceleration of past quarters’ performance. I’ve been trying hard to find all the information available to increase my evidence of my predictions or refute my predictions.
Mark Meeker’s firm published a report the other day. It is very interesting and informative. I would recommend that anyone who owns SaaS companies should read it. It can be found here:
There’s a lot of good stuff and analysis in there. I found the last chart on page 16 very interesting because it provides some evidence that gives some insight into the burning questions above. The slide shows what areas in IT spending will show the largest increase in IT spending in the time of the pandemic. The slide is difficult to see (it’s really small) but some additional sleuthing uncovered the main takeaway. Before I jump to it, I would like to point out that the slide is based on a recent survey of CTOs/CIOs. The source of the data was JP Morgan’s “Q1 2020 AlphaWise CIO Survey”. I have tried to get access to the survey, but haven’t seen it for myself yet (still trying). I did find the following article that referenced the survey:
The following is an excerpt from the article:
CIOs plan to increase spending most for cloud computing, security and collaboration projects, according to Morgan Stanley. “Security has become by far the most defensible IT project,” critical to supporting remote work through collaboration, VPN or remote access and desktop virtualization.
So the people who control spending on IT in companies that are customers of our SaaS companies are saying where they are increasing spending. That information is worth a lot. It corroborates the hypothesis that spending will not slow down on products and services related to the areas mentioned.
My own thoughts and analysis lead me to implement some portfolio changes. Below is my current thinking on each of the stocks that I own:
CRWD: Of the stocks in my portfolio, CRWD has my highest conviction to increase business fundamentals performance the most. There has been a large increase in endpoints that need security. Hackers are now more active so threats have increased and fear and the desire for information about the coronavirus increases the likelihood that employees will fall for a hacker’s attempt to compromise an endpoint. IT spending will increase for security over what was being spent prior to the pandemic. CRWD is super easy and very fast to deploy into a large enterprise. Prospective customers (IT leaders) are not in the office so they are doing everything, including new deployments of IT software, remotely; CRWD (unlike ZS and others) is the best at this. I believe CRWD will beat expectations and see their fundamentals improve. I think this is true regardless of whether the lockdowns end quickly or drag out. The only flaw I see with CRWD is the possibility of disruption. I say this because it has happened before in this market.
OKTA: I think OKTA will also see an improvement in their business fundamentals from these lockdowns. I don’t think that the benefit will be as large as it is for CRWD. OKTA is also growing more slowly. I believe that OKTA’s competitive positive is extremely solid and that disruption by a competitor is very unlikely; OKTA is the undisputed leader in its market.
DDOG: DDOG’s applications are needed more than ever. Networks and application performance need to be monitored and logged because more employees are connected to applications and systems than before. The systems are getting stressed and their ongoing function (no downtime) is important for business operations. IT staff are at home too so they need to monitor and fix things remotely. Having things in the cloud (as opposed to on company servers which the IT staff can’t necessarily fix from home) is a big advantage. Like with CRWD, DDOG’s product/service is very easy to deploy. DDOG is so easy to install and it should be a breeze to do remotely. Easy on-boarding in the time of WFH is a big reason why I see DDOG doing very well. There are no call options available past October 2020 and I think it’s too risky to buy calls with so little time until expiration. Disruption is also a hallmark of DDOG’s market so while my confidence for DDOG is very high, I am keeping an eye out for evidence of disruption (none detected yet).
ZM: The increase need and use of Zoom is undisputed. This will continue as long as the lockdowns remain in place. I agree with many that even after the coronavirus is no longer a threat, we will see increased use of Zoom persist.
AYX: AYX offers tremendous ROI and it’s hard to go back to your old ways after you’ve used Alteryx. I am still wondering whether or not revenue growth rate will accelerate, decelerate, or remain unchanged. Alteryx is a great tool for efficiently solving problems (finding solutions to problems) and there are a lot more problems to solve now since the way of doing business has been altered in many ways. I eagerly await May 7th to see the results from Q1 and hear what management has to say.