October 21, 2019 BARRON’S 23
Tech Trader
Enterprise Tech Is Becoming a Tough Sell
By Tae Kim
ENTERPRISE TECH HAS BEEN A HOT AREA FOR INVESTORS
in recent years, but the theme works only as long as
corporate buyers are paying up for the technology.
That’s no longer a sure thing.
Awaveofnewdataindicatesthatspendinggrowth
couldweakeninthecomingyear.Blameworriesabout
the global economy and the continuing trade war.
GoldmanSachs’Septembersurveyoftechnologysellersshowedthat
demandtrendsfromlargecorporationshave“deterioratedmarkedly”
across all industry verticals, compared with its June survey.
“Wearetakingamorecautiousviewofenterprisespendingandpar-
ticularlylargeenterprise-exposedcompanies,”wroteana-
lystRodHallinGoldman’sreportearlierthismonth.“Our
analysissuggeststhattherecouldbefurtherdeclinesin
spending.”
Business confidence is an essential part of large tech
purchases. Worsening sentiment could spark a negative
feedback loop where perception becomes bleak reality.
The turning point may have come in August when
CiscoSystems (ticker:CSCO),aleadingmakerofrouters
andswitchesandanotedbellwetherofcorporatespend-
ingtrends,saiditwasseeinganegativeimpactfromthetradewar,with
thecompanynotabletoclosesomeofitsdeals.Wewroteaboutthose
comments at the time, surprised by the dire nature of it all.
MorganStanleyanalystJamesFaucettetells Barron’s thatweaker
commentaryfromlargesupplierslikeCiscomayhaveforcedcompanies
to reassess their budget spending outlooks. “There is certainly some
anxiety in the U.S. corporate sector,” he says.
The recent results from Morgan Stanley’s third-quarter survey of
100chiefinformationofficerssupporttheview.Technologybudgetex-
pectations fell for the fourth straight quarter, according to Morgan
Stanley,withspendingseengrowing4.4%forthisyear,downfrom4.9%
forecastayearago.Thechiefinformationofficersexpectanotherdown-
tick in 2020 to 3.4% growth.
“The big takeaway is the market hoped—after several rounds of
cuts—that IT spending growth would stabilize heading into 2020, and
thatdoesn’tappeartobethecase,”saysMorganStanleyanalystKaty
Huberty. There’s caution about signing long-term deals heading into
2020,sheadds,“withslowergrowththanwe’veseeninseveralyears.”
ThispastWednesday, IBM (IBM)told Barron’s thatitsoutsourcing
business—GlobalTechnologyServices—missedinternalexpectationsfor
thequarterduetolowerclientbusinessvolumesintheUnitedKingdom
andGermany.Hubertyseestheshortfallasatellingsignofaweaken-
ingglobaleconomy.ManyofIBM’soutsourcingcontracts,shenotes,are
tiedtoreal-timetransactions.Thatmeansashortfallreflectsreal-time
shifts.Theweakeningsentimentisnotjustatheoreticalconceptshow-
ing up in CIO surveys; it’s happening as we speak.
ForresteranalystAndrewBartelsalsosaystheenvironmentfortech
spending is decelerating from a macro perspective. His firm has found
thattechnologyspendingcorrelatescloselywithglobaleconomicgrowth.
Heestimatesthattechpurchasesbygovernmentsandbusinesseswillrise
by3.2%nextyearversus4.5%thisyear.“Weareexpectingtoseeaslow-
down in tech spending in 2020,” he says. “Slowing economic growth
around the world is in turn leading to slowing tech-market growth.”
There’s at least one bright spot left, though. Bartels points to
strengthinthecloudmarket.Hesaysthatsoftwareandcloudsolutions
continue to take market share from legacy on-premise hardware and
consulting services, at least in terms of corporate budget priorities.
IBMChiefFinancialOfficerJamesKavanaughseessimilartrends.He
tells Barron’s that corporate tech budgets are moving to-
wardthecloud,data,artificialintelligence,andthesecurity
markets. “Client buying behaviors are shifting to quick
payback, ROI, efficiency, and productivity,” he says.
So what should investors be most wary of now?
With the iShares Expanded Tech-Software Sector
exchange-traded fund (IGV) down nearly 10% since its
Julyhighs,alargepartofthenegativitymayalreadybe
discounted, given the group’s still-strong fundamentals.
Topholdingsinthefundinclude Salesforce.com (CRM),
Microsoft (MSFT), and Adobe (ADBE).
On the flip side, the big risk may be in chips. The iShares PHLX
Semiconductor ETF(SOXX)isup38%yeartodateandisdownjust
2% from its high. The chip industry is a key supplier to on-premise
hardwareequipmentvendorsthatarefacingsecularchallengesfromthe
cloud.
Even in a lackluster economicenvironment,companiesthatofferabet-
terdifferentiatedofferingcanstilldowell.Thatseemstobecasefor Tai-
wan Semiconductor Manufacturing (TSM). The company currently
dominatesthehigh-endofchipmanufacturingforcompanieslike Apple
(AAPL), AdvancedMicroDevices (AMD),and Qualcomm (QCOM)that
need the best performing, bleeding-edge chips for their products.
Earlier this month, Barron’s suggested that TSM was a good way
toplayinnovationtrendssuchasartificialintelligence;fifth-generation,
or5G,wireless;andcloudcomputing—allwithlessriskfromthetrade
warcomparedwithothertechnologycompanies.Atthetime,thecom-
panytoldmeitwasplanningtoraiseits2019capital-spendingplansto
meet “strong demand” for its services.
ThispastThursday,thecompanydidexactlythat.TSMbeatearn-
ingsestimates,raisedguidancefortheDecemberquarter,andincreased
itscapital-expenditureguidancerangefor2019bysome35%,orroughly
$4 billion. The company highlighted robust demand for its advanced
manufacturing processes.
In recent months, TSM shares have rallied, giving the company a
largermarketvaluethanonetimechipking Intel (INTC).TSM’sout-
performance will probably continue in the coming year.
GoldmanSachssays
corporatespending
plansfortechproducts
have“deteriorated
markedly.”