Why are analysts worried about corporate technology spending?

SAP has just enjoyed the most successful year in its forty year history with top-line growth coming from new technologies, strategic acquisitions that reposition the company for the future and robust corporate spending. The stock price gained about 10% over the year, which given the current economy is a stunning performance. I just hope the fund managers looking after my pension plan have it over-weighted in their portfolios.

But if you read the analysts comments, investors are worried that they may have overestimated the resilience of corporate tech spending in a deteriorating global economy, especially when some big tech companies are reporting weak quarterly results. My view is they’ve no need for concern. While SAP stock price may be fully valued at 14 times future earnings, I doubt if companies are going to pull the plug on technology investments anytime soon. While the stubbornly high level of inflation may be squeezing the family budget and austerity measures are reducing public sector spending, most large companies are sitting on big piles of cash that frankly they are struggling to spend. Many are buying in their own stock or increasing dividends. To me this is always a sign that current investment opportunities are either thin on the ground or not making their hurdle rate of return.

The only other option is pursue investments that will improve efficiency and increase margins – and for the most part that means technology. However I do think companies are being smart in choosing where to spend their dollars and are positively seeking out solutions and technologies for the future such as in-memory computing and mobility, which is exactly the space SAP now occupies.

Good news all round? Well not quite. The sting in the tail is that in a low growth economy, improved efficiency and increased margins generally means letting people go and that means less consumer spending to fuel the much-needed growth. Perhaps that’s why some analysts are taking a more guarded view on technology stocks.

Postscript – In the current economy, we should remember that even those tech companies that are reporting ‘disappointing’ results are doing far better than companies in many other sectors.

6 thoughts on “Why are analysts worried about corporate technology spending?

  1. Nice article…and to offset some of ‘the sting in the tail’ is the hiring news from the US:

    “SAP Will Add 500 Jobs in Newtown”
    Delaware County Daily Times (USA) – 02/01/2012

  2. Forrester Research has forecast the US tech market’s growth at 7.5% for the year ahead, revised upward from the 6.6% growth projected a few months back. For 2013, IT spending is expected to grow by 8.3%.

    In fact, given its level of influence on the future of an organization and its “high” costs, IT departments are now increasingly being managed by CFOs.

    Also read http://www.minacsblogs.com/FinanceandProcurement/TechnologyinFinanceAccountingITsAllintheNu.aspx

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