A Reboot for Software

The convalescence that follows the coronavirus outbreak could hasten the addressable market for some segments of the software industry. No doubt the outbreak will inflict immediate pain on most software vendors – public company valuations have fallen for most and acquisitions have dropped off, as uncertainty abounds in both capital and credit markets. Still, the pandemic has inflamed preexisting trends toward digital working and digital shopping. And a faster move toward a digital economy could benefit the software firms that enable that shift.

The pandemic didn't create remote working, online ordering or distance learning, yet it's created a surge in demand for technologies that enable digital interactions among people and businesses. Only a handful of software vendors have realized immediate benefits from the crisis. Having become an overnight staple for road warriors and adjunct professors alike, Zoom Video's valuation has jumped so high (24% in a month) that the rise has spilled over to a public shell company that shares its name. Although, to be clear, most software companies haven't seen an increase in valuation or other short-term benefits. According to S&P Global Market Intelligence's Capital IQ, Citrix alone among software providers in the S&P 500 index saw its stock price rise in the past 30 days.

When the virus abates, many of the new habits developed by consumers and businesses are likely to remain behind. In 451 Research's Voice of the Enterprise: Digital Pulse, Coronavirus Flash Survey, 65% said their organizations have instituted expanded or universal work from home programs as a result of coronavirus – 38% said they are likely to keep those in place post-crisis. Similarly, homebound consumers have shifted more of their time and money to digital interfaces for shopping, banking and entertainment. And the crisis has given companies new reason to invest in those capabilities. For example, we noted in our report on coronavirus and customer experience that the outbreak has shown businesses the benefit of technologies that can scale customer service during a crisis, such as virtual assistants.

Any post-crisis benefits aren't likely to be equally shared across the software market. As my colleague Brenon Daly noted in a recent report, vertical software vendors, especially those tied to exposed industries such as travel, hospitality and energy, are vulnerable. According to 451 Research's M&A KnowledgeBase, 2018 and 2019 saw record amounts spent on business application providers – the two years averaged $91bn in spending, compared with the previous high-water mark of $64bn. And while some companies could emerge with larger sectors, the blend of pain and enlarged opportunities across the software industry isn't likely to be enough to push that corner of the M&A market back up to its previous heights for quite some time.

Figure 1: Coronavirus' impact on company policies