According to the latest forecasts by technology researcher Gartner, Worldwide IT spending is predicted to be $3.8 trillion, a 3.7% increase from 2011. This increase is far less than the 6.9% increase in IT spending during 2011, as a result of faltering global economic growth, the crisis in Europe, and the lasting impacts of the floods in Thailand’s production of hard-disk drivesⁱ.  The floods in Thailand, which left one-third of the country underwater, have had a significant impact on businesses worldwide, particularly computer and storage providers. Since Thailand is a key provider for hard drives, and since it will take time to rebuild its manufacturing facilities, the supply of hard drives is estimated to be reduced by as much as 25% over the next six to nine monthsⁱⁱ. This drop in sales will have a significant effect on the entire technology sector. As the use of mobile devices continues to grow at a rapid pace, spending on telecom equipment is predicted to show the strongest growth of IT spending in 2012,increasing by 6.9% from 2011to $475 millionⁱ.

What other key issues does the technology sector face in 2012?

Compared to the substantial number of Initial Public Offerings (IPOs) during the Dot-Com bubble in the mid to late 1990’s, the IPO market has nearly evaporated in the technology sector. In order for the tech sector to maintain high levels of innovation and start-up companies to stimulate growth by going public, a healthy IPO market is essential.  As many recent IPOs in the tech sector have underperformed, including major companies like LinkedIn and Pandora, companies are hesitant to go public. Also, an important issue that tech companies have to address is patent violation. With companies constantly fighting over rights of ideas, and accusing others of violating patent rights, companies are spending more time avoiding patent violations and less on innovationⁱⁱⁱ.

What will be the major changes and advancements in the technology sector in 2012?

There are four different themes that will drive the outlook of technology sector in 2012. First, there have been significant advancements in data storage, which will likely continue be a top focus of the technology sector. As more and more information is stored electronically, companies are upgrading to advanced data storage technologies. Second, “Cloud computing” has become the next stage in the internet’s revolution which allows everything from computing power to computing infrastructure, applications, business processes to personal collaboration to be delivered wherever and whenever needed. Third, Microsoft has announced the release of Windows 8 during this year. This will cause a number of mobile and desktop application developers to shift their focus, and could give Microsoft’s stock a chance to regain market share. Finally, a theme that has been around for years, and will be here to stay, is the increase in importance of mobile devices.

Advanced Data Storage Technologies

Businesses are experiencing an explosion in the volume of data that must be stored. As more and more business operations become electronic, sufficient and secure storage for all of this information has become vital to keep up with competitors. A number of new technology developments have given businesses different options for managing their information. In an environment where resources and budgets are constrained, many businesses are restructuring their data storage to more cost-effective technologies.

A forerunner in the data storage services provider is EMC Corporation. According to research firm IDC, EMC is currently the leading provider in global storage software, with a market share of 24.5% as of the third quarter of 2011^iv. This share has increased significantly, and analysts project EMC’s market share will continue to grow for at least the next few years^iv. With the rise of Big Data and Cloud services, EMC will have new opportunities to sell newly developed products. Being the market leader, it should benefit the most from these new opportunities. EMC’s current market price is $22 per share, far below past prices of $30 per share, and far below the potential price that Forbes analysts predict the stock could surge to this year, $42. The stock is currently selling at a price-to-earnings of 14 times next year’s estimated earnings, while many of its rivals are selling at a price-to-projected earnings of 25^iv.

Another leading data storage company is Western Digital (WDC). While yet to expand its services into the Cloud, many analysts believe that there will still be strong sales for Western Digital, as there is still potential for hacking groups to ravage the Cloud, which concerns companies^v.  WDC offers a wide array of products that should keep the company moving in the right direction. With cash of $3.5 billion and debt of only $300 million, WDC can easily eliminate its debt and begin spending on the development of new products^v.  WDC’s stock has boasted a 10 year return of 424.03%, and considering it’s potential for continued growth, it’s price-to-earnings ratio of 10.38 makes the stock a relatively cheap buy^vi. It will be important, however, for WDC to find a partner that offers Cloud services, especially if other Cloud storage companies are able to insure protection from hackers.

The concern of the Cloud’s security has given rise to companies that provide data protection. CommVault Systems, Inc. has a software called CommVault Simpana that has been awarded the best enterprise backup and recovery software. Given its performance, a survey reported that 83.7% of users said, “they would do it all over again”^vii. Gartner named Commvault’s software 2011’s “Magic Quadrant for Enterprise Disk- Based Backup/Recovery”^viii. With a 10 year return of 165.71%, and significant growth potential in 2012 with the increasing desire for data security, CommVault Systems, Inc.’s stock could maintain it’s increase in value^vi.

Another storage technology company that should have strong sales in 2012 is Fusion-io Inc. Fusion-io is in the Solid State Storage industry, and considered the top solid-storage drive (SSD) manufacturer^xvi. With the price of SSDs decreasing, many enterprises have been using them for data storage. SSDs also have a vital role in the ultrabook (high-end, thin, ultraportable laptops) market, which is projected to grow rapidly in 2012^ix. The floods in Thailand causing a shortage and increase in price of hard drives has also boosted sales of SSDs. Fusion-io had it’s initial public offering last June, and has had a return of 29.11% since then^vi. Poised to capture more of the market share in the Solid State Storage industry, Fusion-io should probably maintain growth and healthy returns.

Cloud Computing

The Cloud computing business may be one of the most attractive opportunities for investing in 2012. Gartner forecasts strong revenues in the Cloud industryⁱ. There are a number of advantages that Cloud computing offers, which is why it has become the norm for businesses. Companies no longer need to buy data servers, coolers, and other equipment to store their data, resulting in huge cost savings. Substantial physical space is saved without any data hubs, and employees have easy access to any information, anywhere. Additionally, without data storage devices, companies’ IT personnel can focus their time on other problems.  The top providers of Cloud service are currently Amazon (Amazon Cloud Drive), Apple (Apple iCloud), Dropbox, Google, and Windows (Windows Live SkyDrive).  Each of these providers has strengths and weaknesses, but they have established themselves as the top, most reliable Cloud service providers^xvii. Oracle has also recently stepped into the game, and is committed to competing with the other top service providers. With Oracle’s stock at a price-to-earnings ratio of just 14.60, much cheaper than the average price of the other top providers, which is currently at 35.5, it proposes a relatively cheap stock with potential for growth. It also has had a 10 year return of 72.04% compared to the S&P 500’s 10 year return of 8.37%^vi.  However, with stocks currently down as a result of the crisis in Europe, the smaller companies that are offering Cloud services’ stocks could be in a dip and shoot back up in 2012. These companies include Salesforce.com Inc, Riverbed Technology Inc, Taleo, and VMware Inc. among others. Analysts suggest that with their current prices close to a 52-week low, the timing may be correct to consider the expected growth in revenue for Cloud providers in 2012. Taleo, according to JPMorgan, generates just 8% of its revenue from Europe, and therefore has little exposure to potential losses in Europe, possibly making it an attractive buy while it is still cheap^x. There are also a number of start up Cloud service providers that have promising futures. A private company that has excellent potential for growth and could be a primary target to be bought is QVIVO. It designed an application to organize an entire media collection into the Cloud, thereby allowing access to the collection on devices from smartphones to HDTVs.

Gartner also suggested that the industry could experience drastic changes in a short period of timeⁱ. Therefore, although there are a number of start up companies offering cloud services that have strong growth potential, concerns such as security have kept some prospective customers from using Cloud services. Consumers and businesses are not only concerned with the physical location of their data, but they are equally as concerned with the potential for data leakage, or loss. Therefore, it will be important to be vigilant of any security breaches that could hurt the credibility of all Cloud service providers. Overall, Cloud computing is an industry that merits investment considerations in 2012.

Microsoft’s Release of Windows 8

Microsoft’s release of Windows 8 will likely be a key component to the future success of the company.  Over the past several years, the focus of application innovation has drastically switched from Windows applications to web apps. Software is now often first developed on the Internet, where it used to be developed on Windows. Gradually, with the release and growth of other operating systems, including Apple’s Mac OS, the iPad and iPhone’s iOS, Google Chrome, and others that incorporate web applications, a hole has been growing in the sales of PCs. This has contributed to Microsoft’s five-year loss of 6.75% in value. However, despite sales of Windows 7 having recently slowed significantly (likely as a result of the announcement of Windows 8), Microsoft has still experienced a return of 6.19% in the last six months^vi. Windows 8 will have the capability of operating on desktops, as well as tablets, a key new feature that should help Microsoft capture a larger share of the nascent tablet market. As there are still many enterprises that are largely Windows dependent, the integration of Windows 8 to tablets will propose a much easier option to businesses than switching to Apple’s iPad, giving Microsoft a distinct advantage. Microsoft’s stock has a dividend yield of 2.89% and a price-to-earnings ratio of 10 (as of January 5), which is lower than the P/E ratios of Apple, IBM and Google, 27.67, 12.64, and 29.34, respectively^vi. Assuming that the release of Windows 8 is successful, which is no guarantee considering the criticism that past Windows versions have received, it could be a catalyst to boost some life into Microsoft’s stock.

Importance of Mobile Devices

The use of mobile devices has grown vastly over the past several years. The world now has over 4 billion mobile phones in use, of which 1.08 billion are smartphones and 3.05 billion of them are SMS enabled^xi. The smartphone market is projected to have sales of 650 million units in 2012, a 35% increase from 2011’s sales of 481 million units^xii. Telecom companies are moving quickly toward 4G networks and devices.  The recent failed acquisition of T-Mobile by AT&T will likely give Verizon Wireless a leg up, as AT&T will not only have to pay the $6 billion breakup fee to T-Mobile, but also lost its opportunity to use T-Mobile to expand its airwaves. As AT&T is already heavily criticized for dropped calls, this leaves AT&T with “few attractive strategic options as it seeks to challenge market leader Verizon Wireless,” said Scott Moritz at The Washington Post^xiii. Another loser from the failed acquisition is Deutsche Telekom, T-Mobile’s owner, which is struggling to compete in the market, as small competitors are edging out T-Mobile subscribers. According to Hal Singer with Navigant Economics, “T-Mobile needs a backer that is committed to investing in its future.^xiii” However, Verizon is another company whose stock should be approached with caution. Although they have experienced record sales of the iPhone, it is the most heavily subsidized phone by carriers, Therefore, Verizon’s profit margins on sales have slipped. Wireless carriers’ main goals are pushing toward more 4G LTE infrastructure, as well as expanding their coverage zones with more towers. As a result, SBA Communications (SBA), a telecommunications service provider, is poised for a strong year in 2012. They are a leading owner and operator of wireless communications infrastructure across North America. SBA has had a 10 year return of 233.93% and could still rise in value with the increase in demand for high- speed-data from leading wireless carriers^vi.

With the drastic increase in smartphone and tablet users, the mobile advertising industry will grow at a rapid rate. Companies that are the most creative in finding ways to differentiate themselves in their mobile advertisements will likely benefit the most from this industry.  Mobile banking will also become essential for financial institutions. The capability of smartphones to handle a variety of transactions, including depositing checks by snapping a picture of them has made banks focus on translating online banking to mobile banking for customer and business clients^xviii.

The recent addition to the iPhone 4S, Siri, which is a voice recognition technology that acts as a personal assistant for the iPhone’s iOS, will likely spur other mobile device manufacturers to invest in speech recognition technology. Siri will likely soon become a universal feature on smartphones across all manufacturers in order to remain competitive. Nuance Communications (NUAN) is currently the leader in the speech recognition space, and Siri requires NUAN’s transcription ability to operate^xiv. As Siri on the iPhone has been a major success, it will likely be incorporated into other technologies like tablets, and eventually even TVs. This puts NUAN in a position for potential rapid growth as its technology could become mainstream very soon. As NUAN has had a return of 129.93% in the past 5 years, and with potential for continued, accelerated growth, the stock is definitely worth considering investment^vi.

Other companies that will likely have strong performance in 2012 include Apple and Qualcomm. Despite the death of Apple’s legendary long-time CEO, Steve Jobs, the fact that competitors have yet to come up with a tablet or phone that can compete with the iPad or iPhone should help keep Apple’s sales strong. Even if the release of Windows 8 threatens sales of the iPad and MacBooks, Apple has established its capability to stay ahead of competition. There have been reports that Apple is preparing to launch an assault on the television market, confirming that Apple’s innovation capabilities will continue even without Jobs^xix. Qualcomm is a leading maker of integrated circuits for mobile phones. It provides parts for many top-selling smart phones, a sector that continues to see strong demand. With a 10 year return of 123.01%, a dividend yield of 1.53%, and a strong balance sheet for Qualcomm, its stock merits investment consideration when the share price is below $55^vi.

Other News for Tech in 2012

Perhaps Wall Street’s most anticipated IPO of all time will likely occur in 2012. Facebook is expected to go public, and if reports are correct, Facebook could hit a $100 billion valuation. Goldman Sachs and Morgan Stanley are currently the frontrunners that Facebook is considering to lead the offering. If the fees for Facebook’s IPO are 2.2% as they have been for other IPOs of it’s size, the banks leading the IPO could reel in as much as $220 million. Additionally, as Goldman invested in Facebook in a past private offering, even if it loses top spot in orchestrating the IPO, it will still double it’s stake in the company, gaining an instant $375 million profit^xv. 

There are four other potential tech IPOs to watch in 2012. Yelp, a user-generated review site has filed with the SEC and is looking to raise $100 million, with Goldman Sachs and Jefferies as the lead underwriters. SunGuard, a technology services company that is focused on the financial sector is also expected to go public. Tumblr, a New-York based social media site, and Dropbox, a cloud-based data storage company both have raised substantial venture capital and could go public, or be bought by larger companies^xx. These tech companies should be wary as they go public, as the major tech companies that went public in 2011, Zynga  LinkedIn, GroupOn and Pandora have since seen their stock have an average decline of 28.37%^vi. The performance of tech IPOs in 2012 will largely depend on the health of the stock market and how other offerings fare.

The last aspect of the tech industry to be aware of is the strong likelihood that several states will lift their sales tax amnesties for online businesses during 2012. The suggested sales tax change would force online-only retailers to collect taxes from out-of-state customers^xxi. Amazon would likely take the largest blow from this policy change, as these amnesties have given the online-only retailer a huge competitive advantage. They are capable of charging lower prices than other online retailers that must incorporate sales taxes into their costs. The companies that should most benefit from this potential change would be big-box retailers like Best Buy, Walmart, Target, and eBay.

*For our complete database of articles please go to www.armstrongadvisory.com.

ⁱ "Gartner Says Worldwide IT Spending to Grow 3.7 Percent in 2012." Gartner IT Spending Forecast. (2012): n. page. Print. <http://www.gartner.com/it/page.jsp?>

ⁱⁱ  "Thai floods hit global hard drive supply chain by 25%." ProcurementLeaders. N.p., 9 Jan 2012. Web. 9 Jan 2012. .

ⁱⁱⁱ Openshaw, Eric. 2012 Outlook on Technology Interview. Web. .

^iv  "EMC Can Ride Software Surge To $42 Stock Price." Forbes. N.p., 6 Jan 2012. Web. 6 Jan 2012. .

^v  "A Look At The Data Storage Industry: Top 3, Bottom 3, 2 Speculative Plays." Seeking Alpha. N.p., 22 Aug 2011. Web. 5 Jan 2012. .

^vi <http://www.google.com/finance/>

 

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