For the past few years, I have greatly valued being on Jason Maynard’s email distribution list at Wells Fargo, as I have found that he and his colleagues have one of the most solid perspectives on enterprise computing on Wall Street.
Earlier today, I received a fascinating thematic report entitled “Technology Convergence & Consolidation: Cash or Charge? Part Two,” that once again helped shed some new light on a key market dynamic in enterprise tech.
The report details how the technology sector has evolved increasingly into a defensive market sector, from an investment point of view. With the maturation of the enterprise and consumer tech segments, tech providers have grown into massive cash machines – such that tech companies now hold 30 percent of all cash among non-financial balance sheets in the S&P 500 ($360 billion out of $1.1 trillion). Since the early 1990s, cash has risen from “10 percent of assets on technology sector balance sheets” to “27 percent of total tech assets” … which represents an annual growth of “18 percent over the past 20 years.”
As the report states, “by comparison, S&P non-financial cash stores were 3 percent in the early 1990s, versus 11 percent today,” which represents 15 percent annual growth over the same period.” The current economy has also encouraged many tech giants to issue debt, at very attractive long-term rates, further encouraging the M&A-driven environment we are in. Lastly, a number of players are also now issuing dividends – something that was an anathema in this sector not all that long ago.
In addition, the tech giants have become much more stable platforms for investors, with less earnings volatility – in large part due to the entrenchment of IT spending in corporate budgets over time. Since the mid-90s, IT’s share of US business fixed investment has grown from 20 percent into the mid-50 percent range today. In our most current tepid recovery, fixed business investment has been strong, whereas other areas of GDP growth have been weaker.
The thesis of the piece emphasizes the gargantuan cash sitting on the sidelines, combined with the earnings stability brought about by consistent year-over-year corporate fixed business investment, increasingly makes the technology sector a very interesting investment category – defensive yet with significant growth upside.
The only significant issue that I would have with the thesis would be to fully understand the forward financial impact of the shift to the Cloud – with its emphasis on expense- rather than capital-driven spending, and the potential for the total corporate funding pot to potentially stagnate or go down slightly over time (given tight IT budgets and the efficiencies brought about by shifting to a Cloud-enabled enterprise computing architecture).
The good news is that the new revenue streams are highly recurring, predictable and visible, which will bode well for the mega-vendors consolidating the emergent Cloud pure-plays. At the same time, however, none of the publically-traded Cloud players have yet to deliver the pre-tax margins of their traditional on-premise brethren.
This blog originally appeared at Saugatuck Technology.
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