Montgomery Securities put up several of its own people to present the house view at its 14th Annual Technology Week investment conference last week, and Thomas Thornhill, director of technology research for Montgomery, asserted that capital spending on information technology is growing at a rate of more than 20% per year, fueling overall growth of the worldwide high- technology sector that will soon result in sales of more than $1,000bn per year. Montgomery is forecasting overall growth of 15% to 20% in capital spending on computing, instrumentation and communications technology, at a time when non technology capital equipment spending is declining, so that by 2000, overall worldwide spending in the sector is seen at over $1,400bn, up from about $950bn this year. Despite a long bull market, Thornhill continued, Montgomery sees continuing opportunities for investors in the high-technology sector – a controversial view, since there are few seasoned investors prepared to trust this over-heated bull market much further. The argument is that among the companies that made presentations at the conference, Montgomery is projecting an average annual growth rate of 32% but a 1997 price-earnings multiple of 27.3, leading it to conclude that as a whole, the companies that made presentations are actually selling at a discount to their growth rate, which is billed as a significant opportunity for investors looking for technology stocks. The trends fueling growth include companies committing to a new round of technology spending designed to increase productivity, Thornhill said, in particular the corporate upgrade cycle as companies convert to Windows-based desktop computing on the Intel Corp Pentium Pro microprocessor. He also cited a new generation of client-server applications and rising data communications needs as trends that are driving the upcoming upgrade cycle. He cited a survey by Deloitte & Touche in which 83% of chief executives polled said they viewed information technology spending as a strategic investment. 72% had explicit goals in their business plans to increase such spending in the future, with the most common planned uses for newly-acquired technology being the development of company intranets, accessing the Internet and using electronic mail systems, according to the survey, which found that the factor driving overall demand for information technology was its value as a tool to improve productivity, customer service and quality. Thornhill suggested that a shift away from traditional information processing towards communications-rich applications was actually creating a new product cycle. The personal computer business came under the spotlight when Kurt King, personal computer industry analyst for Montgomery Securities, took the podium with a mixed message – brutal competition has driven much of the profitability out of the desktop personal computer industry, but the outlook for makers of notebook computers and servers is considerably brighter: product mix, marked by a shift to notebook computers and servers, will increasingly determine the winners and losers in the personal computer industry, he asserted. He bemoaned the continuing commoditization of desktop personal computers as hundreds of manufacturers crowd the market with personal computers featuring iAPX-86 micro-processors and the Windows operating system, so that profit margins are being driven down, with, he estimates, the typical gross margin on a consumer desktop personal computer down to only about 10% – in a market that is slowing, so that desktop sales will grow only about 15% annually in the near term. In contrast, he sees notebook sales growing at more than 20% annually and server sales growing at upwards of 25% to 30% per year – a key attraction for the manufacturer being that a lower percentage of the total cost of notebooks and servers is down to Intel Corp micro-processors, while the higher research and development cost to design and manufacture notebooks and servers successfully creates real barriers to entry for the low-end, commodity oriented personal computer makers. Enterprise software that solves major business problems across an entire organization is in short supply and offers software companies and investors enormous opportunities, reckons Montgomery Securities software analyst Bob Austrian. He believes that as a result, this is the dawn of a new era in software, an era that should last for a long time. He claims that despite the proliferation of hardware, enterprise-wide applications are in their infancy and that there are glaring inefficiencies in such basic services as car rentals, directory assistance and automated banking, despite heavy investment in information technology, and that these basic inefficiencies are creating a huge opportunity for software developers to come up with innovative, value-added applications. Software analyst Austrian also believes that the biggest opportunities are for companies that develop revenue-enhancing software, rather than expense-control applications – and that corporate end-users will pay substantially more for products that grow revenues and create greater external customer satisfaction than those that control expenses.
