Gartner's Latest IT Spending Forecast Shows The Huge Impact The Cloud And Mobile Are Having

| About: Technology Select (XLK)


This Seeking Alpha Eye on Tech column looks at a Gartner forecast that IT spending will drop 0.5% in 2016, after falling 6% in 2015.

While forex and macro issues are playing a role, Gartner's estimate also shows the impact cloud services and smartphones are having on traditional IT markets.

Such a fast-changing landscape means investors in enterprise tech firms need to be selective. Tech ETFs arguably provide a safe haven.

After dropping an estimated 6% in 2015 (a strong dollar weighed on reported international sales), Gartner estimates global IT spending will drop 0.5% in 2016 to $3.49T. That's worse than a prior forecast for 0.5% growth; Gartner (NYSE:IT) blames the change on forex. It also observes that macro pressures in various international markets are having an impact.

How different parts of IT are affected

Two of the five segments covered by Gartner's forecast - Devices and Communications Services - are respectively expected to decline by 3.7% and 2% in 2016. It's not a coincidence those two segments are the ones arguably seeing the greatest disruption from the large-scale adoption of smartphones.

Source: Gartner

Devices sales are, of course, being pressured by weak PC demand, which in turn has much to do with extended upgrade cycles as consumers and businesses direct more of their hardware spend towards mobile devices (smartphones especially). The fact older PCs are able to handle most mainstream productivity and entertainment tasks without much trouble also doesn't help.

Communications Services, meanwhile, have been hurt by declining traditional mobile voice and SMS revenue, as communication shifts more and more towards smartphone apps delivering VoIP and messaging services. It has also been hurt by declining wireline telecom revenue - caused by a mixture of landline cancellations (in favor of going mobile-only) and the adoption of VoIP and cloud-based unified communications services.

Meanwhile, Data Center Systems and IT Services are expected to see subdued growth, as dollars previously directed towards on-premise IT hardware and services shift to buying access to cloud infrastructures that are powered by cheap commodity hardware and generally run more efficiently than on-premise infrastructures.

Software, which has long been growing its share of total IT spend, is a bright spot. But even here, much of the growth is coming from cloud/SaaS apps that are often replacing on-premise apps. Gartner also notes delays in Windows 10 and Windows Server 2016 adoption are affecting growth.

Gartner's John-David Lovelock doesn't mince words while spelling out the impact of cloud-based services on traditional IT hardware, software, and services spend. "Most traditional IT now has a 'digital service twin' - license software has cloud software, servers have Infrastructure as a Service, and cellular voice has VoLTE. Things that once had to be purchased as an asset can now be delivered as a service. Most digital service twin offerings change the spending pattern from a large upfront payment to a smaller re-occurring monthly amount. This means that the same level of activity has a very different annual spend."

What this means for investors

This kind of IT upheaval suggests enterprise tech investors need to be selective, with an eye towards gauging how well-positioned a particular company is in dealing with the cloud and mobile shifts. A look at IBM (NYSE:IBM) and VMware's (NYSE:VMW) 3-year charts, and how they compare with the Nasdaq's, drives home what can happen to even giant, well-respected, enterprise tech firms having a rougher-than-expected time dealing with changing tech tides. A lot of IBM and VMware's challenges might now be priced in, but casualties among other firms strongly exposed to traditional IT markets are bound to emerge over the next several years. Meanwhile, some of the companies widely seen as being well-positioned - Amazon (NASDAQ:AMZN), Salesforce (NYSE:CRM), and Workday (NYSE:WDAY) come to mind - have been granted steep multiples that could cap their gains even if they continue executing well.

In such a landscape, broad-based tech ETFs such as the Tech Select Sector SPDR Fund (NYSEARCA:XLK), the Vanguard IT ETF (NYSEARCA:VGT), the iShares U.S. Tech ETF (NYSEARCA:IYW), or the iShares North American Tech ETF (NYSEARCA:IGM) arguably offer a safe haven for those wanting exposure to enterprise tech (along with other tech areas), but aren't sure who the winners will be. Investing in them will, of course, limit your upside, as the ETFs will have positions in losers as well as winners. But if you still feel confident about the broader tech sector's ability to deliver healthy sales and profit growth over the long run, there are definitely worse places to be.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

About this article:

Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here