Software stocks have fallen in lockstep with hardware shares since both sectors peaked about 18 months ago, but the same hasn't been true for software spending by U.S. companies.
In fact, it's remained relatively strong, and that actually worries some analysts.
"Make no mistake about it, the recently ended IT boom was more about software than hardware," Stephen Roach, chief economist at Morgan Stanley Dean Witter, wrote in a note entitled, "The Next Leg of the IT Downturn."
"I suspect that the software cycle will now follow the hardware cycle to the downside," said Roach, who thinks the IT spending decline will be longer and deeper than Wall Street is expecting.
The S&P Systems Software Index is down 57% from its March, 23, 2000 peak, while the S&P Computer Hardware Index has lost 55% since that time. But analysts say software cycles tend to lag hardware cycles by about six months -- bad news if share prices continue to reflect the industry's fortunes.
Recent tidings from the software sector support the point. Just last night,
, a supply chain software company, said it would miss second-quarter earnings by a country mile. Rather than the 3-cent profit analysts were expecting, the company told Wall Street to expect a loss of 14 cents to 16 cents a share. Manugistics blamed last-minute order delays from customers in all market segments, and noted that even those businesses that had initially "appeared robust" had suddenly become more cautious about their spending.
Data and storage software firm
reaffirmed its 25% to 35% growth forecasts for 2001 yesterday, but said it was nervous about a possible downturn in Europe. And rumors have surfaced that
may miss its earnings targets for the fiscal first quarter, which ended in August.
Investors were punishing the stocks accordingly. Manugistics was falling 37% today and taking other supply chain software outlets with it.
was down 15%, and
was off 8%. Veritas was losing 4%. Oracle was down 8%.
A look at recent data illustrates how much slower U.S. companies have been to cut back on their software spending versus hardware spending. Business investment in software was up 6% from a year ago in the second quarter to $189 billion, though it peaked at $193 billion in the fourth quarter of last year, according to recently revised GDP data from the Commerce Department. By comparison, hardware spending was down 18% from a year ago in the second quarter to $90 billion.
U.S. businesses have been bulking up on software since early 1990. Between 1990 and 1997, businesses spent $1.40 on enterprise software for every dollar spent on computers and computer equipment, according to Roach. In the 1998 to 2000 period, business allocated $1.70 to software for every dollar on hardware. And by the second quarter of this year, they were spending $2.09 on software for each dollar on computer hardware.
Roach worries this may mean that when the downside of the software cycle hits, it will hit with more fury than it has in the past. "As a result, the macro consequences of a software downturn are likely to be considerably greater this time around," he said.
Still, Roach's bearish stance has skeptics.
"Software is not the same kind of game as hardware," said David Wyss, economist at Data Resources Wharton Economic Forecasting Associates. Wyss and other economists argue that software is a more integral part of what a company does, and that the economy has changed significantly since the early and mid-1990's, when the software cycle was shown to lag the hardware cycle.
"It will probably come down for a couple of quarters, but it won't take the same kind of dive that we saw on the hardware side," said Wyss, who added that he would be surprised if software spending fell below $175 billion or $180 billion.
A big question for Wyss and others is whether
new Windows XP application, released to computer manufacturers in late August, meets with sufficient demand.
"One of the real questions will be whether Microsoft XP takes off," he said. "Will companies feel they have to standardize on Windows XP, or will they stick with original programming?"