Bloomberg | Bloomberg | Getty Images
After the latest earnings from large technology companies and the increasing layoff headlines in the sector, tech investors can be excused for feeling a bit confused: Is the tech-led economy about to fall off the recessionary cliff?
Shares like Amazon.com and Microsoft was crushed after missing analysts’ growth forecasts for its cloud computing business, which relies on corporate demand for technology and innovation. It is also among the tech giants that have announced hiring freezes and job cuts. The path of technology demand is one of the key questions as the market tries to weather the possibility of a 2023 recession. But the latest report on the third quarter gross domestic product has investment in equipment and intellectual property on the rise – including hardware and software technology.
Experts say the likely conclusion is that demand for technology continues to grow — and that companies across the economy will continue to see technology change the nature of their businesses and workers will see technology change their jobs. Whether that offsets weakness elsewhere in the economy is another question. Amazon said in the third quarter analysts called that weakness in industries such as banking and cryptocurrency translated into lower demand, as the Covid pandemic hit demand from companies and workers adjusting to remote work has slowed down.
“CEOs and CFOs have no intention of cutting technology spending,” said Gartner chief forecaster John-David Lovelock. “The chief information officer is still wearing a halo from 2020, and the CEO will return to the person who gave them the last solution.”
On the bright side, the GDP report painted a picture of strong technology demand, said Bank of America Merrill Lynch economist Michael Gapen. The shortfall in investment spending was driven by a sharp decline in residential investment, he said.
“The surprise, if anything, is that equipment spending is stronger than expected, Gapen said. “Investment in the category is going to be persistent. If we have a risk, it is that this grows at a slower pace. It would take a severe recession for this to go down.
Demand remains strong for both hardware and software. For intellectual property, investment fell 3.6% in 2009 but rose an average of 10 percent each year in 2021 and 2022, Gapen noted.
Tech spending as a whole will increase by approximately 5.1% next year after a gain of less than 1 percent this year, according to a new survey by Gartner, which is almost unchanged from the previous survey this year, and reflects the executives’ knowledge that companies are cutting investment during. The 2008 financial crisis severely lagged competitors in the years that followed, said Lovelock.
Even as companies pulled back investment in buildings and oil rigs, investment in computers, software and communications equipment rose at an annualized clip of 10.8% in the third quarter, the government said, part of a long-term trend that supports steady technology investment.
“The data has come in right around our forecast, except for consumer devices, which is slightly lower,” Lovelock said. Both semiconductors and consumer devices are working in a situation where heavy demand in 2020 cannot be maintained, after workers strengthen their home offices, causing households to have new equipment on hand and some new applications that encourage to increase the increase, he said.
Growth in cloud computing, the highest technology investment category in recent years, has slowed only slightly and is destined to decline from its initial hyper-growth stage, Lovelock said. Gartner expects cloud computing revenues to rise to $101 billion next year – more than $90 billion in 2021, but representing a small percentage of growth. In percentage terms, cloud spending will increase by about 20 percent for the next two to three years, according to Gartner’s forecast.
“If Microsoft (cloud services business) is growing 50 percent and is now 35, it’s hard to say it’s bad news,” he said.
Microsoft admits that some customers are cutting budgets, the result of the revenue forecast for the coming quarter that disappointed the market, but said the demand for fast growing services they should help with cost pressure. That’s because cloud computing is usually cheaper than the solutions it replaces. Amazon added that it may move some clients to cheaper versions of its cloud services that use less expensive chips, for example.
“As a CFO, I appreciate that, and we do the same thing here at Amazon,” Amazon chief financial officer Brian Olsavsky said afterward. his earnings.
The problems of enterprise technology companies are very different from those that usually depend on consumer spending, e.g applesor in advertising spending, like Platform Meta, Facebook parents. Apple, which beat its quarterly forecast for the September quarter, has seen its share price outperform its peers, despite warning over the weekend that China’s Zero Covid policy and the outbreak at Foxconn will be significant. the impact of the new iPhone production. Facebook, hampered by large initial losses in its metaverse investment that Evercore ISI analyst Mark Mahaney says could shave $5 a share from 2024 earnings and declining engagement with its core social media platform, saw the stock tank after its third-quarter report and is now reportedly getting ready for announced major layoffs.
As housing investment cratered during the third quarter, investment in intellectual property (including some software, research and development, and entertainment creation) rose at an annual rate of 6.9%.
Overall, tech industry profits will grow about 2 percent this year, rebounding to 6 percent growth in 2023, CFRA Research estimates.
That will reflect a divide between rising sectors such as cloud computing and legacy manufacturers, many of them in software, who are struggling to keep customers moving to web-based products, said CFRA technology analyst John Freeman. Before this year, cloud revenue was still about 40 percent from enterprise software, he said, suggesting there’s room for more change in the industry — and in the experience of non-tech workers who will move to new ways of working. .
“Nothing has changed in terms of the underlying technology,” Freeman said. “It has increased, actually. Once the macro risks eventually settle down, people will move forward because companies need to become more nimble. [slowdown] will be more painful for those who rely on legacy software.”
The continuing shift in technology spending toward internet-based technology will mean challenges for companies moving to the cloud as quickly as they can, Freeman said.
Oracle, for example, get more than 30 percent of revenue from cloud products, and executives said in September that the company’s growth will accelerate as it becomes more cloud-focused. Microsoft will juggle the impact of its fast-growing cloud business and other businesses, such as LinkedIn and the Bing internet browser, and a measured decline in its legacy Windows business, Freeman said. Other legacy software players, such as in the recently completed merger of Tibco Software and Citrix Systems, may go private and conduct their transition away from the public market spotlight, he said.
But for companies that embrace technology and their workers, the pace of change is unlikely to slow, Lovelock said.
“The pace of change will never slow down,” he said.