"In recent years, the software sector has benefited from a number of ongoing trends, and investors did the right thing when they bought software shares during periods of macroeconomic uncertainty (tax cuts, customs duties in China, legislation). Although we are not seeing the disappearance of demand because of the coronavirus at this stage, we do detect disruptions in the short term," economists at Credit Suisse write in their review of the software sector in the light of the coronavirus.
Credit Suisse believes that companies that also have hardware elements or exposure to the hardware sector, companies that are more dependent on face-to-face meetings for business development, and companies providing lower priority solutions with a longer period for a return on the investment "or anything that can be postponed with minimal business impact or without any impact" will be more affected.
Credit Suisse's analysts list the software companies that they cover and assess them on the basis of a number of possible risks. "The clearest risk is disruption of the global supply chain," they write. "Microsoft has already lowered its guidance in computing, and we believe that other companies dependent on the components supply chain, from providing a firewall to software companies related to installment of servers, are liable to be at risk."
The second risk pertains to sale processes. Companies whose processes are more similar to consultation with a close connection are at greater risk. Another distinction is between companies tending to renew deals with existing customers and those that expand to new customers; companies whose growth is more oriented to renewal of deals have lower risk than others.
Another criterion is the extent to which a company's output is critical. Credit Suisse says that in a more difficult macroeconomic environment, there is a need to rationalize budgets. Providers of software related to more critical projects (mission-critical projects) will have lower risk than providers of solutions that are only nice-to-have.
Medium risk of postponing purchases of cybersecurity products
Another question is working from home. As a result of the virus, many companies are allowing employees to work from home, and Credit Suisse's analysts believe that software companies that provide solutions for communications and collaboration are likely to benefit from this, as well as companies benefiting from Internet traffic.
A final point addressed by Credit Suisse is the date on which the companies published their guidance for this year. "Given the timing of the events, when the decline in the volume of flights became more serious, starting in late February, we detect a greater risk in companies that provided earlier guidance, without taking these disruptions into account," they write.
With respect to Check Point Software Technologies Ltd. (Nasdaq: CHKP), Credit Suisse says that it has exposure to hardware, most of its growth comes from renewal of contracts, and it is not expected to benefit from the trend towards working at home. Credit Suisse classifies the risk that purchases of Check Point's products will be postponed if the uncertainty continues as medium.
Credit Suisse says that Palo Alto Networks' sales require a close connection with the customer, it has exposure to hardware, its growth comes from both renewal of deals and new customers, and it is unlikely to benefit from more people working at home. Credit Suisse says that the risk of purchases of Palo Alto's products being postponed if the uncertainty persists is also medium.
Published by Globes, Israel business news - en.globes.co.il - on March 9, 2020
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