Morgan Stanley hunts communications-software gems in new risk-off world
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A preview of upcoming earnings in communications software gives Morgan Stanley a chance to absorb the new "risk-off" atmosphere that has sent tech names tumbling - but it's largely sticking with new-year resets, and sees some opportunities across its coverage.
Growth software keeps contracting (-13.5% so far in 2022, and communications software down 12%), but "resellers continue to see strong demand and expect to hold '21 growth rates in their UCaaS and CCaaS businesses this year," Meta Marshall and team write.
Among businesses offering unified communications-as-a-service, a positive outlook is "balanced" by some more commentary around normalizing post-COVID deal cycles, and a growing interest in Microsoft Teams (MSFT
-0.3%), the firm says. Even so, that's not likely to effectively counter the bear narratives in the space, a reason it cites for going to Equal Weight on RingCentral (RNG
-1.3%), and staying neutral on 8x8 (EGHT
+1.6%).
Checks are turning out more positive in call center-as-a-service offerings, it says: Not only is it a "more friendly" competitive environment, but big customers are pushing deals with features that enhance average revenues.
The best way to deal with pessimism in the space is growth in market extensions, it says: "Growth in core market alone was not going to be enough to move coverage universe. Instead, coming out of COVID and WFH [work-from-home] enthusiasm, it was going to be ARPU expanding feature adoption that had the best chance of resetting narratives."
As examples it cites AI feature sets with contact center and Five9 (FIVN
-2.2%), customer engagement with CPaaS and Twilio (TWLO
-3.5%), and Phone, Rooms and Events with Zoom Video Communications (ZM
-3.3%).
Five9 (FIVN
-2.2%) is the best way to capture durable growth in the contact center space, the firm says, noting the resellers it talks to are all dedicating incremental time to CC deals, and it's most optimistic on Five9's prospects. Commentary also leans positive on Nice Ltd. (NICE
-2.5%).
Meanwhile, clearer growth expectations should be a positive catalyst for favored Twilio (TWLO
-3.5%), as well as for Bandwidth (BAND
-3.3%), Morgan Stanley says. Twilio should see 30% growth for multiple years, which isn't captured in today's valuation, and Q4 should be a positive catalyst as tough comparisons fade further into the background, it says.
Zoom's (ZM
-3.3%) position is underappreciated by the market, the firm says, and growing interest in Microsoft Teams isn't leading to cancellations. "It was also noted that these Teams integrations are largely around centralizing on Teams as a collaboration tool and many examples included customers maintaining Zoom licenses for video usage, as well as their UC systems."
The firm's catalysts and checks lead it to be most positive on Twilio (TWLO
-3.5%), Zoom (ZM
-3.3%) and Five9 (FIVN
-2.2%). It's staying Equal Weight on RingCentral (RNG
-1.3%) and 8x8 (EGHT
+1.6%), where growing interest in Teams could prove a negative.
Five9 also drew some top-pick praise from Baird last week in its 2022 cloud software look ahead.