DELL - Hybrid work future positive for Cisco Dell; challenging for Xerox REITs - Morgan Stanley survey

2023-06-03 12:35:00 ET

With the advent of the pandemic hybrid work became more pronounced, and according to Morgan Stanley's AlphaWise survey hybrid work is here to stay.

The survey, which is in its third year, suggested that current operating levels of hybrid work are largely stable, both of which require less office real estate and more technology investment.

According to Morgan Stanley analysts, the survey found three interesting things — 1) that despite macro deteriorating, hybrid work indications have largely stayed the same (with some increased indications for 3 days in the office); 2) expectations for reduced real estate footprints are smaller than last year, with increased anticipation of having to pay more per sq ft, however still a net headwind 3) and compared to the firm's CIO survey, fewer respondents see their organizations as being past peak spending for in-office connectivity, suggesting to a longer investment period.

The firm sees this as a positive for Cisco Systems ( NASDAQ: CSCO ), Hewlett Packard Enterprise ( HPE ), Dell Technologies ( DELL ); Neutral for HP Inc ( HPQ ), Logitech International ( LOGI ), Juniper Networks ( JNPR ), Zoom Video Communications ( NASDAQ: ZM ); and Negative for Xerox ( XRX ) Vornado Realty Trust ( VNO ) and Office Properties Income Trust ( OPI ).

The survey suggests that about 50% of peak investments towards in-office infrastructure will be after 2023 — an incremental positive for growth windows of networking, PCs, video conferencing software and hardware. WiFi, video, PCs, phones are still the main areas of investment, a benefit to Dell, HP Inc., Logitech (IT hardware), and supportive for Cisco,  Hewlett Packard and Juniper.

Office space demand is expected to decline by -10% over  the next three years as work from home and hoteling desk use continue to remain up. Meanwhile, occupancy headwinds plus elevated financial leverage may keep REITs under pressure, the analysts added.

The firm noted that it was reducing OPI price target -55%, Hudson Pacific Properties ( HPP ) price target -33%, Vornado Realty Trust ( VNO ) price target -8%,and Highwoods Properties ( HIW ) by -4%. Meanwhile, reiterated its UW rating on Vornado and OPI.

Networking :

The survey was incrementally positive on trajectory of campus spending and office networking investment.

The firm added that while it is cautious on networking, due to challenging backlog release comps, the results were more encouraging than expected —  a positive for Cisco, Hewlett Packard and Juniper.

In addition, the firm said that at the stock level, it thinks that the market is overly negative on Zoom's positioning in video conferencing longer term due to increasing use of Microsoft Teams.

Hardware :

The survey pointed to PCs as the primary beneficiary of hybrid work technology spend, with slightly positive/mixed for video conferencing products, but negative for printing. The firm sees a positive for Dell, mixed for HP Inc. and Logitech, but negative for Xerox ( XRX ).

Companies :

Cisco : Similar to Cisco's recent earnings call, the company continues to see higher investment from customers in a hybrid work scenario. The survey was supportive of Cisco's view, with 53% of organizations viewing peak investment through 2023. With the most diversified portfolio to all in-office investment, Cisco is set to continue to benefit from in-office investment, the firm added.

Hewlett Packard : Hewlett Packard is likely to benefit from a longer duration of in-office investment. Plus with the company adding additional security, SD-WAN products into its portfolio, these could benefit from the investment.

Juniper : The analysts noted that with the growing share in the campus switching market, along with the extent that in-office connectivity investment was happening, it should benefit Juniper's enterprise business. In times of macro weakness, people are less likely to switch vendors, with Juniper being the challenger in the market, according to the firm.

Zoom : The continued reliance on video conferencing to help future workplace remains a positive tailwind for Zoom, according to the analysts.

The data suggested — 1) employers are investing in video conferencing tools to help more in-office use of the product, a tailwind for Zoom Rooms; 2) strategic focus in using video conferencing likely supports budget for multiple vendors, where Zoom is commonly seen to providing superior performance across ecosystems.

The analysts said they would like Zoom to continue expanding portfolio to turn more positive on name.

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