Many companies worldwide have used low interest rates and economic recovery to put their balance sheets in order. And now many of these are beginning to invest their high cash reserves in business expansion and, in particular, new information technology.
New equipment purchases will fuel production, which, given the brighter economic forecasts, should translate into improved earnings. Expenditures for IT by global companies in 2014 is expected to grow by 3 to 5 percent and by 4 to 6 percent in 2015. This is an opportunity for investors – despite high profitability, the major companies in the technology industry have relatively low ratings.
The aphorism that “a rising tide lifts all boats” is, nevertheless, not applicable in this case. Induced by technological advancements, corporate investment may give the heavyweights a momentum for the short-term at most. This would be true for companies in the field of hardware such as Dell and IBM. IBM’s downward trend – the company reported a decline in earnings for the ninth quarter in a row – is not likely to be stopped by the updating cycle. That does not mean the old names in the hardware sector should be written off, however.
Exceptions are the companies that have recognized the signs of the times. Among them is Hewlett-Packard, which reacted to changes in the marketplace with a major restructuring program and has a high-margin business with its printers.
The percentage of IT expenditures will shift increasingly in the direction of software and services because issues such as cloud computing and IT security are becoming more and more important in everyday office work.
But that isn’t where the music will be playing in the future. The percentage of IT expenditures will shift increasingly in the direction of software and services because issues such as cloud computing and IT security are becoming more and more important in everyday office work.
Even heavyweights such as Microsoft should profit from the updating cycle, even though the company may miss out on opportunities such as cloud and mobile operating systems. While the market in office software appears to be almost a monopoly, IT services look extremely heterogeneous. Even industry giants such as Accenture don’t have a market share greater than 3 percent. Lots of potential still exists there, not only for emerging companies but also for investors, as well.
What is important for investors to remember is that the world of IT evolves rapidly, and tigers quickly become paper tigers. Take Nokia, for example. The company was once among the leading producers of cellphones, but it missed out on the smartphone boom and was subsequently run over by the competition.
That should serve as a warning. Like buyers of IT, investors should therefore always be technologically on the cutting edge.
The author heads portfolio management stocks at Union Investment and can be reached at: firstname.lastname@example.org