Tech Spending Rebounds as Global Slowdown Fears AbateAnna-Louise Jackson and Anthony Feld
Corporate technology spending is poised to exceed industry projections this year, as the global economy’s recovery spurs investment.
Worldwide expenditures will increase 4.2 percent to $3.7 trillion in 2013, outpacing last year’s 1.2 percent growth rate, based on a forecast from Gartner Inc., an industry researcher. This broad measure -- which includes hardware, software and services -- may underestimate spending, which could expand as much as 5 percent, according to estimates by Rich Kugele, an analyst in Boston at Needham & Co. who has monitored the industry since 1998.
Companies began “under-spending” in May, which lasted through December as “the world became skittish,” Kugele said. With a partial resolution to the so-called fiscal cliff in the U.S. and amid signs of economic re-acceleration in China and stabilization in Europe, the negativity that’s dragged down the industry is starting to lift because “there’s a limit to how long companies can hold back spending on technology that drives the global economy.”
U.S. gross domestic product will expand 2 percent this year, the euro area economy will shrink 0.1 percent after contracting 0.4 percent in 2012 and China’s GDP will accelerate 8.1 percent, based on the median forecasts of economists surveyed by Bloomberg. The U.S. economy grew an estimated 2.3 percent last year, while China’s rose 7.8 percent.
While shares of Apple Inc., maker of iPods and iPads, have fallen 35 percent since Sept. 19, other technology companies have been attracting investment more recently. The Guggenheim Standard & Poor’s 500 Equal-Weight Technology exchange-traded fund has risen 14 percent since Oct. 31, compared with the Guggenheim S&P 500 Equal-Weight ETF’s 10 percent gain.
The technology ETF provides a “different perspective” for the industry by diminishing the impact of any one “oversized” weighting, such as Apple, said Erick Maronak, chief investment officer at Victory Capital Management Inc. in New York, which oversees $28 billion. The recent outperformance of this ETF relative to the market, albeit modest, shows “actual, decent performance” among many technology stocks, particularly small caps, he said.
Companies became cautious because of “uncertainty out of Washington,” though the deal reached earlier this month between Congress and President Barack Obama could result in a “break from seasonality,” Kugele said. The compromise Obama signed into law Jan. 2 averted income-tax increases on most Americans and delayed automatic spending cuts until March 1.
Spending on technology typically is “flat-to-down” through June, whereas growth may be “slightly positive” in the first half this year, Kugele said.
This sentiment was echoed by Synnex Corp., which provides services including IT distribution and supply-chain management. Synnex is “on track” to reach $250 million revenue in its global business-services division, compared with $197.4 million in the 12 months ended Nov. 30, President and Chief Executive Officer Kevin Murai said on a Jan. 10 conference call. “Much of the global economic uncertainty is behind us now, which we believe will help free pent-up demand.”
Kugele maintains a buy recommendation on the Fremont, California-based company.
Investment in data centers to provide storage, software and other computing tasks over the Internet also could spur spending and attract investors because these “good secular trends” increase productivity and efficiency while lowering costs, according to Maronak. Spending related to these cloud services, at $16 billion last year, will grow to as much as $80 billion in the next few years, he said, citing industry estimates.
Intel Corp., the world’s largest semiconductor maker, saw revenue in its data-center group rise 6 percent in 2012 from the prior year, according to a Jan. 17 statement. The group, which accounted for 20 percent of annual net sales, benefited from “a richer mix of products and significant growth in the Internet cloud segment of our business,” Chief Financial Officer Stacy Smith said on a conference call that day. The Santa Clara, California-based company forecasts the unit will “return to double-digit revenue growth” this year, he added.
“It’s hard to bet against the big, monolithic names,” such as Intel and Microsoft Corp. that will benefit from these “big changes,” Maronak said. Still, smaller companies -- including ARM Holdings Plc., Red Hat Inc. and Citrix Systems Inc. -- are another way to get exposure to the increased role of data centers, he said, noting that his fund currently holds these stocks.
The U.S. “should be in slow-growth mode” this year and now that Europe has “taken the meltdown risk off the table” and China’s economy is recovering, cash-flush companies may be more comfortable spending again, said David Katz, who oversees about $850 million as chief investment officer at New York-based Matrix Asset Advisors Inc. One driver of technology spending will be “some catch-up” as businesses upgrade Microsoft’s Windows operating system, he said.
The world’s largest software maker is ending support for Windows XP, which debuted in 2001, as it encourages companies to transition to newer versions, including Windows 8, which it released in October. Redmond, Washington-based Microsoft is seeing “solid demand for our business products and services, with particularly strong growth in multi-year licensing,” Chief Financial Officer Peter Klein said on a Jan. 24 conference call.
This update is “going to affect the whole computer food chain,” Katz said.
Microsoft and Cisco Systems Inc. probably will be the “lead horses” because their stock prices are “very depressed” compared with pre-recession highs, and investors may be too pessimistic about technology, Katz said. “We’re confident there’s going to be a better spending cycle this year, and you’re getting paid a reasonable yield” so there’s potential for an “upside surprise,” he said.
Even so, “robust” spending will depend on whether “company management loosen their purse strings,” Maronak said. Big investments are determined by economic-growth expectations, namely U.S. job creation, he said.
Employers added 161,000 jobs this month, based on the median forecast of economists surveyed by Bloomberg. This follows six months when gains averaged about 160,000, based on data from the Labor Department, which is scheduled to release January numbers on Feb. 1.
By the second quarter, it will be apparent whether the spending environment has improved, Kugele said. While some investors still are “in their bunkers” about segments of the industry, a more optimistic sentiment will benefit stock prices of companies “on the bubble,” he said.
“If tech spending is up, that should lift all boats,” Katz said. “There certainly are some compelling opportunities right now for investment.”