Software purchases, the migration to cloud-based systems and investments to enhance digital capabilities should combine to trigger a surge in IT company profits over the next few years, according to Moody’s Investors Services.
In a research note, reported on by Barron’s, analyst Stephen Sohn and his colleagues predicted that the likes of Adobe Systems Inc. (ADBE), Microsoft Corp. (MSFT), NetApp Inc. (NTAP), Oracle Corp. (ORCL) and Salesforce.com Inc. (CRM) will deliver profits that easily outpace global economic growth. The credit rating agency upgraded its outlook on diversified IT stocks from “stable” to “positive,” based on its belief that EBITDA across the sector will rise by about 7.5% this year, more than double the global GDP growth projection of 3.4%.
All Eyes On Microsoft
Moody’s identified Microsoft as the biggest beneficiary of industry-wide structural drivers. In the report, Sohn and his colleagues forecast that the Redmond, Washington-based company will generate about 28% of EBITDA growth across the sector as its well-targeted investments come to fruition.
“Microsoft will continue to achieve more operating leverage off of stronger revenue growth, as the company's significant investments over last few years level off while new cloud offerings gain strong adoption,” the analysts wrote. "Microsoft’s investments are targeting many of the same market segments as the rest of our proxy group, including data center infrastructure, database, and cloud-based productivity software, which are partially offsetting modestly declining consumer demand for personal computers." (See also: Microsoft Jumps After Earnings Beat.)
One of the biggest growth drivers expected to buoy Microsoft and other names in the sector is cloud computing. The analysts wrote that the technology "will continue to disrupt traditional IT buying patterns for enterprises,” given the "acceleration of deployments to public cloud vendors, such as Amazon.com Inc.’s (AMZN) AWS, Microsoft’s Azure, Alphabet Inc.'s (GOOGL) Google Cloud, and Facebook Inc. (FB).”
Moody’s added that those spending patterns could also “benefit large legacy hardware providers”, such as International Business Machines Corp. (IBM), Dell and Hewlett Packard Enterprise Co. (HPE). All three will “provide the data center gear and digital solutions”, the analysts claimed, before warning that they will also “have to contend with some level of product commoditization and price pressure.”
The ongoing migration to cloud-based IT systems is also expected to benefit IT services companies. Moody’s said the likes of Accenture Plc. (ACN), Cognizant Technology Solutions Corp. (CTSH) and DXC Technology Company (DXC) will be called upon “to manage the process of shifting IT workloads to private and public cloud systems,” while large software firms, including Microsoft, Oracle, SAP SE (SAP) and Salesforce, will likely benefit from “the growth of cloud-based, software-as-a-service (SaaS) offerings.” (See also: Salesforce Is Trading Above the Cloud Before Earnings.)
Moody’s is confident that these drivers can help to offset declining on-premise software license sales. It also predicted that demand for personal computers, a headwind for companies such as Microsoft, could pick up slightly after several challenging years.
Hope Yet for HDD
Finally, the credit agency forecasted a healthy outlook for hard disk drive (HDD) specialists Western Digital Corp. (WDC), Seagate Technology Plc. (STX) and Micron Technology Inc. (MU), despite the looming threat of flash memory. Moody’s analysts expect HDD revenues to “grow modestly” as there will be “an insufficient supply of flash memory to meet the robust storage capacity demand” over the next 12 to 18 months.