As inflation hits levels not seen since the early 1980s, much attention has been given to how consumers are dealing with rising prices and where the average person may be tightening their belts and reining in their discretionary spending.
However, taking budget cuts aren’t just happening around the kitchen table, but it corporate board rooms, too, as some companies are taking hard looks at where they can trim their capital expenses and delay large tech purchases that might not be absolutely necessary at the present time. And a look at the technology hardware sector by Morgan Stanley analyst Erik Woodring suggests that enterprise budget cuts are in the works and a more-cautious view of the market is coloring sentiment now in the second half of the year.
Woodring said that as companies are working through a backlog of big tech orders over the last 18 months, spending on hardware in 2022 is expected to grow at the slowest rate among major IT spending categories. According to a survey of chief information officers, Woodring said hardware spending is estimated to increase by just 1.8% this year over 2021. By comparison, communications equipment spending is expected to rise 3.4%, services will see a 3.5% rise in spending and software spending is expected to rise by 4% this year.
“[The] first hardware budget cut suggests more downside to spending before budgets [hit] bottom,” Woodring said. In addition to companies working through their prior purchases, Woodring said there is a broad-based cautious outlook in place due to fears about the probability of a recession happening some time in the next year. “We could see another two [or] three hardware budget cuts.”
Woodring said that he is most cautious about spending on personal computers, but also everything from printers to flash storage, and desktop equipment to infrastructure hardware is at risk of being trimmed by corporate budget makers.
As far individual enterprise hardware companies are concerned, Woodring cited IBM (NYSE:IBM) as strong due to its recurring revenue and software business. Woodring said that the three-year “spending intentions” for IBM (IBM) have improved over each of the last four quarters, while those same intentions appear to have leveled out for many of IBM’s (IBM) rivals. “We view this more sustained improvement [versus its legacy industry peers] incrementally positively,” Woodring said.
IBM (IBM) is scheduled to report its second-quarter results after the close of trading on July 18. Wall Street analysts currently estimate IBM (IBM) will report a profit of $2.29 a share on $15.18B in revenue.
Woodring also said he was upbeat about cloud-data technology company Teradata (NYSE:TDC), as spending on data management and services is “more defensive” even during a period of budget cuts or recession. According to Woodring, Teradata’s (TDC) success in the next year or more “hinges on their ability to convert existing [on-premise] customers to the cloud,” and getting customers to spend more once they move their operations to Teradata’s (TDC) cloud platforms.
Analysts are looking for Teradata (TDC) to report a profit of 29 cents a share, on $441.5M in revenue when it delivers its next quarterly results on August 4.
Wall Street analysts and Seeking Alpha authors have consensus hold ratings on both IBM’s (IBM) and Teradata’s (TDC) shares. Seeking Alpha’s quant system, which regularly outperforms the market, also has a hold rating on IBM (IBM) and on Teradata (TDC).