Analysts are expressing optimism for IT spending in 2011, as companies show improved earnings coming out of the deepest U.S. recession since the 1930s.
“Our survey results indicate a positive near-term read on IT spending consistent with an optimistic view of the fourth quarter,” wrote the analysts in a Goldman Sachs study released Nov. 5 called “IT Spending Survey.”
“Our total IT spending index [which includes salaries, services, depreciation, etc.] increased to the highest level since November 2007… We increase our 2010 growth estimate to 8% from 7% previously due to stronger vendor results year to date.”
However, analysts could not pinpoint if they are “merely optimistic because of 4Q trends, or could 2011 be relatively better for IT spending despite a low growth U.S. GDP [gross domestic product] environment, given cash-rich corporate balance sheets,” the survey said.
On the heels of the Goldman Sachs survey, Google gave an unexpected US$1,000 cash holiday bonuses to its 25,000 employees and a 10% company-wide raise effective Jan. 1, 2011. In addition, Google will move a portion of the bonuses into employees’ base salaries, ensuring they get to keep the whole thing, said Google CEO Eric Schmidt.
Brian Belski, chief investment strategist at Oppenheimer (an investment advisory firm), pointed out that tech companies have also become more economical with the way they are run.
“These companies have dramatically changed their business models in terms of how they manage their businesses and are much more conservative. It’s all about the balance sheet and cash flow. It’s about under-promising and over-delivering,” he said.
“Remember, this is a sector that many people blamed for the bubble in 1999 and 2001…so, they’ve had a complete reshaping of how the sector is looked upon and, I believe, relative to 10 years ago, this is a sector that is now much more professionally managed. [There are] true CEOs, true CFOs, where in the 1990s it was easy for the stocks to go up because there was so much demand and technology was hot.”
As IT spending shows signs of increasing, some companies, such as Apple, reported record revenues this quarter. Other software companies reported increased numbers across the board.
“When you look at the underlying data [beneath] sales, earnings, margins and balance sheet strength, all are extremely positive,” said Nicholas Roccanova, senior investment strategist at Oppenheimer.
“Why? Well two things. First, contrary to popular belief, business spending for technology has been growing for a while. Second, despite challenging economic times, consumers are still spending, but they are being smarter about it,” he added. “So, they are choosing to spend on products that they deem to offer exceptional value for their particular circumstance, and many technology companies fall under this category.”
Additionally, software hiring is accelerating, according to a Morgan Stanley report released Nov. 8. “Our proprietary job tracker shows record levels of hiring at tech companies coupled with a material upswing in open positions posted by tech implementers and corporate IT departments, which we view as a further sign that demand is strengthening into 2011,” the report said.
Relative to headcount, Red Hat and Salesforce.com have the most job openings, reflecting high growth. “However, increased hiring could weigh on margins near-term as new employees take time to ramp up and as companies add headcount ahead of sales,” the report’s authors added.
But, “of just spending in general, the economy, in terms of what we look at, has clearly bottomed and is beginning to recover,” Belski said. “And when economies recover, employment recovers, and when employment recovers, personal consumption expenditures come back and we are a gadget-type consumer nation that will benefit technology.
“And technology, from our perspective, along with industrials, are the two more innovative sectors that will help our country kind of grow out of this situation.”