sanford c. bernstein & Co. LLC
Growth in worldwide IT and communications equipment spending in 2003 should accelerate 7% to 8% as significant underinvestment in technology since 2000 forces an upgrade cycle. This will occur even in the absence of robust economic recovery.
Government, third-party sources, and our own surveys suggest that, on average, technology products have roughly a four-year useful life. With a rebound in IT spending highly likely, the key question is whether U.S. companies can gain share of the overall spending pie and grow faster than the market, as current consensus estimates imply. We expect U.S. equipment manufacturers to match the overall market growth rate, but fall slightly below the 8% to 10% consensus expectation.
During the second quarter there was a surprisingly wide divergence in product demand by geographic region: software was unusually weak in Asia, communication equipment was weak everywhere except Europe, while computer hardware experienced the greatest weakness in Europe. The downturn in European demand for hardware was driven by deflationary pressures and was the primary reason for sales shortfalls among systems and PC vendors.
Imminent recovery is unlikely, but a combination of strong software sales (which we believe leads a recovery and is indicative of new projects) and the weak U.S. dollar argues for gradual improvement over the next few quarters. Re-inflation is unlikely to surface
until the emergence of performance-intensive "killer applications," which are necessary to drive an upgrade to leading-edge hardware.
Technology sector sales growth as a whole has benefited over the past decade from several trends that probably will not persist. The horizontal disintermediation of companies has contributed significantly to sales growth since the early '90s. With only a few large, full-service technology conglomerates left, further disintermediation appears unlikely. In fact, the overall economic downturn could result in more-centralized IT budget structures and greater emphasis on managing IT complexity, increasing demand for one-stop shopping services.
Also contributing to the perception of strong growth has been the proliferation of new, smaller companies via initial public offerings, spinoffs, etc., which tend to grow faster than larger companies. This influences investors' perception of how fast an average technology company is growing, and will have the greatest impact on expectations rather than the reality of growth opportunities within the technology sector.
An analysis of the 1984 to 1990 technology bear market offers applicable lessons in identifying which areas of technology should emerge the strongest from the downturn. We would emphasize sectors currently acting as technology "bottlenecks" within the overall industry-software, services, and storage-as the most attractive secular ideas.