Yesterday I was speaking to someone regarding the future of the information technology sector in the short-term and long-term. I believe that we can to the following conclusions:
1. Information technology is a horizontal sector, meaning that it pertains to consumer, government, services and industrial markets, and all niches from consulting to metal stamping, from coffee shops to open-pit mines. Information is infrastructure.
2. Information technology is no longer a speculative bubble as it was in 2000-2002, although there remain speculative niches within the broad sector. Overall, the sector generates reasonable cashflow and free cashflow growth.
3. Relative to some sectors, the cash to long-term debt ratios are positive.
The conclusion was that because information technology is such a broad sector, it should mirror not the US economy but the world economy. Worldwide stimulus initiatives by governments should create areas of opportunity within the sector. As President Obama (he's pretty much running the show now) puts the finishing touches on his massive stimulus package, the IT sector should benefit overall, however it is becoming clearer that some niches should benefit more than others:
- Companies that provide IT infrastructure including storage, bandwidth, switching, routing, virtualization, and security should benefit directly from the stimulus package.
- Clearly healthcare technology providers should benefit, although there should be few winners and a lot of losers. There has been a lot of work done already on EMR in anticipation that the healthcare sector would adopt more IT solutions. To date, lack of political will has resulted in anemic uptake and a highly fragmented niche with a lot of minor vendors struggling to make money. There are likely to be few upstart winners, although most of the business should be earned by established healthcare technology providers like McKesson (MCK.NYSE). One could expect to see the usual suspects, led by Google (GOOG.Q), Microsoft (MSFT.Q), and IBM (IBM.NYSE) become more aggressive in gobbling up small and mid-sized specialists in the area.
- A vast majority of stimulus packages worldwide are focused on physical infrastructure such as roads, bridges, rail, and power. Although these initiatives are much smaller than the Obama package, there is likely to be benefit to engineering, production, and project management applications vendors.
- speaking of power, Obama's alternative energy plans will require significant IT support in hardware, firmware and software.
- Congressional hearings related to the financial meltdown are likely to result in more rigourous regulatory regimes, which could benefit IT vendors at a scale similar to the Sarbannes-Oxley accounting regulations resulting from the Enron scandal.
Public stimulus projects are only part of the story. Consumer spending habits and behaviors are already changing, and priorities should be much different this time around as compared to previous recessions. Here are some themes ( which have been touched on previously):
- Mobile subscription is a utility that is more important that cable TV, landline telephony, internet access, and in some parts of the world, electricity.
- According to published reports by the Mastercard Advisors, this Christmas online spending trends outperformed bricks and mortar. We may find an upsurge in online spending as consumers become more frugal and retailers move deals online. As retailers are forced to begin to consolidate the physical retail network, look for a new wave of investment in online security, payment systems, and logistics.
Information is the foundation of modern economies. The need for more efficiencies, reliability, and effectiveness should increase as the world economy recalibrates. Niche opportunities exist within the broader market that could have a 3 to 5 year time horizon.
I do not own any of the stocks mentioned in this post, nor do I receive any compensation from management.
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