It's spring and the
is in the tank -- so it must be time to prepare for the end-of-year tech rally.
We've seen the late surge in six of the last seven years and with a basket of bellwether technology issues trading at or close to a market multiple, it may well happen again, say Goldman Sachs analysts Laura Conigliaro and Rick Sherlund.
"In recent history, tech has rallied to end both good and bad years and has started earlier in the past two years, moving from October to mid-August," they write. The rally could start as early as July when the second-quarter preannouncements come to an end, "but investors must first slog through difficult seasonal business, including the overhang of a very weak Europe."
Difficult is right. The possibility of a late rally is wrapped around Goldman's latest IT spending survey, and that news is worrisome. Growth in 2005 IT operating budgets, and in IT capital budgets, will slow to 3% and 2%, respectively, from earlier readings of 3.6% and 2.9%, according to a survey of 100 IT managers with purchasing authority at large multinational corporations.
Coincidentally, a more anecdotal report -- also published Thursday, by Prudential Securities analyst Brent Thill -- points in much the same direction.
After listening to presentations by the chief information officers of companies including
, Thill wrote: "Perhaps the most striking statement was how software was shrinking as a percentage of the overall IT budget."
Indeed, according to BP's chief information officer, of the company's $2 billion budget this year, only $120 million, or 6%, will be spent on software. And of this $120 million, about $90 million will be spent for renewals of past purchases, leaving only $30 million for new software purchases.
"Any way you slice it, this is not encouraging for software spending," Thill added.
What's more, the CIO of Kaiser said the quality of software is now "abysmal," and the Lockheed executive said problems in his company's systems had skyrocketed in the last two years.
Asked in the Goldman survey which companies are gaining share of companies' technology dollars, the IT managers listed
as the biggest winners, while
were the biggest share losers.
CA's loss may have been partially because of more competitive pricing, with customers asking for better deals but not necessarily jumping to rival vendors, the analysts wrote. But BEA, which saw its share in the survey decline for the first time, is apparently losing ground to its rivals.
"Checks with channel partners and large
system integrators point to BEA's ongoing issues in competing effectively against the largeplatform vendors such as
, and increasingly SAP," they said.
What to do in the meantime? The Goldman analysts picked five names (in hardware, software and services) that they say are trading at "temporarily depressed valuations":
Research In Motion
Satyam Computer Services
. Goldman has investment banking relationships with Accenture, EMC, Research In Motion and SAP.
Another survey question contained good news for software vendors with broad offerings, and bad news for the "best of breed" bunch, i.e., companies whose software is narrowly focused. Half the managers said they are looking to reduce the number of vendors with whom they deal, including 10% who expect the reduction to be dramatic, while just 7% said they expect to expand the number of vendors with which they do business.
Those findings support the notion that companies like Oracle, SAP and IBM, which provide well-developed software infrastructure, will thrive, while point players, even large ones like BEA or
, will continue to struggle, and may even be gobbled up for their technological expertise and customer base.