VC Marc Andreessen famously quipped that software is eating the world. It's certainly eating up a bigger and bigger portion of corporate IT budgets.
This week, research firm Gartner estimated that enterprise software spending rose 8.5% in 2019 to $453 billion, even as total IT spending (pressured some by forex swings) rose a paltry 0.5% to $3.74 trillion. The firm also forecast enterprise software spend will rise 10.5% in both 2020 and 2021, easily outpacing IT spending growth of 3.4% and 3.7%.
While software spending is growing strongly, the story looks very different for hardware spend. Gartner estimates that spending on data center systems (pressured by weak enterprise server/storage demand and a cloud capital spending pause) fell 2.7% last year to $205 billion, and expects it to grow a mere 1.9% in 2020. Cloud hardware spending should grow much stronger than this, but traditional enterprise hardware sales might again struggle to grow.
Spending on "devices" -- defined by Gartner as PCs, phones and tablets -- is believed to have dropped 4.3% last year to $682 billion, and is expected to grow just 0.8% this year.
Gartner's numbers provide some context for the sharp contrast between the macro commentary provided on one hand by major IT hardware firms such as Dell Technologies (DELL) , Cisco Systems (CSCO) and NetApp (NTAP) , and on the other hand by major software firms such as Microsoft (MSFT) , Salesforce.com (CRM) and ServiceNow (NOW) .
The hardware firms, whose sales are getting stung by cloud infrastructure adoption, have often claimed that macro pressures are hurting them. But the software firms have generally reported seeing either no meaningful macro impact or (as is the case for companies such as SAP (SAP) and Autodesk (ADSK) ) reported seeing limited macro pressures centered around verticals such as automotive and manufacturing.
It's hardly a coincidence that companies well-exposed to the parts of IT spending budgets that are growing at a healthy clip are far less likely to report macro headwinds than the companies depending on parts of IT spending budgets that are either shrinking or remaining stagnant. As enterprises decide that it's in their interests to spend more on software to do everything from making workers more productive to better engaging with customers to obtaining insights from business data, the companies supplying the apps and software platforms needed for these efforts are having no trouble continuing to report strong top-line growth.
And for many of these companies, a business model shift from license and maintenance revenue streams to cloud/SaaS subscriptions has been a clear tailwind as well -- both in terms of growing the amount of long-term revenue the companies get from major clients and making their businesses less vulnerable to macro swings.
Certainly, markets are well-aware of the secular tailwinds that so many enterprise software firms are seeing, as a look at their forward sales, earnings and cash-flow multiples drives home. But if and when those multiples drop some -- perhaps due to a broader tech correction -- enterprise software will (on the whole) probably be a much better place for growth-oriented investors to deploy their capital than enterprise hardware, considering how businesses are now choosing to deploy their IT dollars.
