Why Tech Spending Will Rise Even as Tech Stocks Crash and Layoffs Rise

After recent big tech company profits and headlines of industry layoffs, tech investors can be excused for feeling a little confused: Is the tech-driven economy about to fall off a cliff? recessive?

Actions like Amazon.co.uk and Microsoft was beaten after missing analysts’ growth forecasts for its cloud computing business, which depends on enterprise demand for technology and innovation. They are also among the tech giants announcing hiring freezes and layoffs. The trajectory of technology demand has been one of the key questions as markets try to reduce the chances of a recession in 2023. But the latest third quarter gross domestic product report showed an increase in investments in equipment and intellectual property, including technology hardware and software.

Experts say the likely conclusion is that demand for technology continues to grow – and businesses across the economy will continue to see technology change the nature of their business and workers will continue to see technology change their jobs. Whether that offsets weakness elsewhere in the economy is another question. Amazon said in its third-quarter analyst call that weakness in sectors such as banking and cryptocurrency was translating into lower demand, as the Covid pandemic’s growing demand from businesses and of workers adapting to remote work has slowed.

“CEOs and CFOs have no plans to cut technology spending,” said Gartner chief forecaster John-David Lovelock. “CIOs are still wearing their 2020 halo, and CEOs are going back to the people who gave them the latest set of solutions.”

On the positive side, the GDP report painted a picture of fairly strong technology demand, said Michael Gapen, economist at Bank of America Merrill Lynch. The capital spending shortfall was driven by a sharp decline in residential investment, he said.

“The surprise, if any, was that capital spending was stronger” than expected, Gapen said. “Investment in this category is going to be persistent. If we have a risk, it is that it grows at a slower pace. It would take a severe recession for that to decline.”

Demand remained strong for both hardware and software. For intellectual property, investment fell 3.6% in 2009, but grew by an average of 10% per year in 2021 and 2022, Gapen noted.

Overall tech spending will rise about 5.1% next year after gaining less than 1% this year, according to a new Gartner survey, which is nearly unchanged from surveys earlier this year, and reflects executives’ knowledge that companies cut investment during the 2008 financial crisis set competitors back sharply in the years that followed, Lovelock said.

“The data came in right around our forecast, with the exception of consumer devices, which were a bit lower,” Lovelock said. Semiconductors and consumer devices are operating in a situation where strong demand in 2020 cannot be sustained, after workers strengthened their home offices, which provided households with relatively new equipment with few compelling new apps to spur upgrades, he said.

Growth in cloud computing, the most prominent technology investment category in recent years, has slowed only slightly and was destined to slow after its initial hyper-growth stage, Lovelock said. Gartner expects cloud computing revenue to grow by $101 billion next year, up from the $90 billion in 2021 but representing a smaller percentage of growth. In percentage terms, cloud spending will grow by about 20% over the next two to three years, according to Gartner forecasts.

“If Microsoft (cloud services business) grew 50% and it’s now at 35%, it’s hard to say that’s bad news,” he said.

Microsoft acknowledged that some customers were cutting budgets, leading to revenue forecasts for the coming quarter that disappointed markets, but said demand for their faster-growing services should be helped by pressures on costs. Indeed, cloud computing is generally less expensive than the solutions it replaces. Amazon added that it may move some customers to cheaper versions of its cloud services that use cheaper chips, for example.

“As CFO, I appreciate that, and we do the same here at Amazon,” Amazon CFO Brian Olsavsky said after his results.

The problems of enterprise technology companies are very different from those that depend primarily on consumer spending, such as Appleor on advertising expenses, such as Metaplatforms, parent of Facebook. Apple, which beat quarterly projections for the September quarter, saw its stock perform better than its peers, although it warned over the weekend that China’s Zero Covid policy and outbreaks at Foxconn would have an impact significant on the production of new iPhones. Facebook, hampered by big early losses on its investment in the metaverse which Evercore ISI analyst Mark Mahaney says could cut $5 a share from 2024 earnings and falling engagement with its major platforms -social media forms, saw shares tumble after its third-quarter report and is now reportedly getting ready to announce major layoffs.

Overall, tech industry profits will rise about 2% this year, rebounding to 6% growth in 2023, estimates CFRA Research.

This will reflect a split between booming industries like cloud computing and legacy producers, many of them in software, who are scrambling to keep customers moving to web-based products, said John Freeman, technology analyst at CFRA. Prior to this year, cloud revenue was still around 40% of that of enterprise software, he said, suggesting there is room for much more change in the industry – and in the world. experience of non-technical workers who will transition to new ways of working. .

“Nothing has changed in the fundamental technology outlook,” Freeman said. “It’s gotten better, actually. Once the macro risks are finally sorted out, people will move forward because businesses need to become more agile. That [slowdown] going to be much more painful for those who depend on legacy software.”

The continued shift in technology spending toward internet-based technology will present challenges for companies moving to the cloud as fast as they can, Freeman said.

Oracle, for example, derives more than 30% of its revenue from cloud products, and executives said in September that the company’s growth would accelerate as it focuses more on the cloud. Microsoft will juggle the impact of its fast-growing cloud businesses and other businesses, such as LinkedIn and the Bing internet browser, and a measured decline in its legacy Windows business, Freeman said. Other legacy software players, like in the recently completed merger of Tibco Software and Citrix Systems, could go private and work their transitions away from the glare of public markets, he said.

But for tech-spending companies and their employees, the pace of change isn’t expected to slow down, Lovelock said.

“The pace of change will never be slower again,” he said.