Wall Street Beat: Tech May Be a Bright Spot in Tough Economy
Tech stocks ended the first trading week of 2012 on an upbeat note even though both Forrester and Gartner this week forecast slowing growth in IT spending, due mainly to concerns about the global economy.
The Nasdaq Computer Index closed Friday at 1,425.65, up 5.03 points. The increase was not big, but nonetheless a bright spot on a day in which the Dow Jones Industrial Average closed down by 55.78, at 12,359.92, and the S&P 500 closed down by 23.25, at 1,277.81.
Analysts expect software sales to be strong this year, and in general agree that while spending on hardware will remain under pressure, it will nonetheless rise. But the global economy is giving mixed signals.
There are increasing signs that the U.S. economy is getting stronger. Friday, for example, the Department of Labor reported that the U.S. added 200,000 jobs in December, reducing the unemployment rate to 8.5 percent. The news followed other reports of increased hiring.
However, fears about European debt still weigh on investor confidence. Italy's largest bank, Unicredit, this week offered to sell
Forrester Friday released its latest IT spending forecast for 2012, projecting a slowdown in the global IT market from 9.6 percent in 2011 to 5.4 percent in 2012 when measured in U.S. dollars. In local currencies, the slowdown will be from 6.7 percent in 2011 to 5.3 percent in 2012.
The main cause is the recession which, most likely, has already taken hold in Europe, with modest growth in the U.S. and a potential easing of growth in Asia Pacific also contributing, according to Forrester analyst Andrew Bartels .
On a global basis, IT purchases will be US$2.1 trillion in 2012. Software, at $529 billion, or 25 percent of the total, maintains its position as the largest category of spending, according to Forrester. Computer equipment, at $438 billion, or 21 percent of the total, is second, followed by IT consulting and systems integration, IT outsourcing, and communications equipment (excluding telecom services).
"If companies see slower growth in revenues they look for ways to cut costs, and CIOs say what can we cut in IT," noted Bartels.
For its part, Gartner announced Thursday that it had lowered its 2012 forecast, with IT spending expected to rise only 3.7 percent, rather than the previous forecast of 4.6 percent growth. Citing faltering global economic growth and the eurozone crisis, Gartner said global IT spending in 2012 will total $3.8 trillion.
The difference between the figures from Forrester and Gartner lies mainly in how they define various categories of IT, notably software, services and communications.
Amid the gloom about the European crisis, however, there are signs of strength in IT, which may account in part for the upbeat ending to the week. Both Forrester and Gartner say that enterprise software will be strong.
"We see faster growth in product categories including rich analytics and software that allows people to collaborate both internally and externally with suppliers, customers and mobile users," said Bartels.
This will set the stage for faster growth in 2013, which Forrester pegs at 8 percent in U.S. dollars.
Another reason for underlying confidence in IT is that corporate spenders appear to be focused on the long term.
"While IT buyers are certainly not happy with Washington or how the fine bureaucrats in Europe are handling their fiscal crisis, they have become somewhat immune to the short-term news cycle that so enthralls Wall Street," noted a report this week from Canaccord Genuity written by Richard Davis and David E. Hynes .
Hardware is under more pressure than software, because it is easier to put off PC purchases than halt a strategic rollout of software that a company has committed to, analysts say. But there is some good news in the hardware and components sector as well.
"We believe worldwide semiconductor revenue growth is becoming more correlated with worldwide GDP growth as emerging economies continue to grow and comprise more of the technology consumer base," according to a Sterne Agee report. Based on the International Monetary Fund's estimate for 2012 worldwide GDP growth of about 4 percent, semiconductor revenue could increase about 6.5 percent in 2012, compared to about 0.9 percent in 2011, according to the report.
So while IT spending growth is likely to slow in 2012, analysts agree it will exceed general economic growth and remain a relatively bright spot in what is likely to be tumultuous year.