The biggest financial story of the past 50 years just got bigger. Dell (Nasdaq: DELL ) this morning said that it is seeing "further softening" in global demand in the current quarter.
Lehman Brothers' failure isn't directly to blame for Dell's woes, which management says it will address via layoffs, a restructuring, and investments in acquisitions and infrastructure. But the bank's failure has two major implications for tech's titans:
- Global access to capital is tightening, which means all but the most critical capital spending plans are likely to take a back seat for now.
- Less liquidity in the market will continue to be bad for an already-stalled IPO market, which means techies that depend on acquisitions for growth are likely to see fewer opportunities in the near term.
Call it a flesh wound rather than a death knell.
Pity the losers
Capital spending is where Cisco's (Nasdaq: CSCO ) bread gets buttered. Sure, it has Linksys Wi-Fi routers and other small-time products that touch consumers but, on the whole, it's the big-ticket buyer that shops at Cisco, the CIO looking to upgrade his network. Less capital budget means fewer upgrades.
Juniper Networks and Intel (Nasdaq: INTC ) face a similar problem, though Intel may not be hit as bad because of its consumer ties; fast-moving Apple is a large customer. Oracle (Nasdaq: ORCL ) , meanwhile, relies on its shopping savvy to fund growth. Fewer IPOs won't help.
Microsoft could take a hit if the PC upgrade cycle slows as Dell expects. But even then it's likely to be minimal: Windows and Office are dominant franchises and will continue to fund massive cash flows for Mr. Softy.
But Microsoft is the exception; leverage is far more common. Firms take on debt to fund expansion and then rely on excess cash flow to pay down interest and obligations. The housing sector works this way. So do many European firms. When the cost of debt rises -- or when access to capital evaporates, a la the dot-com meltdown of 2001 -- capital spending slows.
Celebrate the winners
The good news? Winners can still be found in a slowdown because CIOs rarely halt spending completely. More often, they'll prioritize, investing in projects capable of producing very high returns or addressing a critical need.
Security falls into the "critical need" category. Infonetics Research said that worldwide spending on network security rose $1.4 billion, or 6%, in the second quarter. Gains should continue, which is good news for specialists such as VASCO Data Security. "Though the economy is still depressed overall, staggering increases in attack volume have forced companies to continue making new investments in security," wrote analyst Jeff Wilson in a research note.
IBM, meanwhile, looks strong because it's so diversified. Big Blue is also a strong player in global markets such as India and tends to sign very long-term services deals that guarantee revenue.
But when it comes to "very high return" opportunities, none are more interesting than cloud computing. Let's review the technology's advantages:
- Very low upfront implementation costs.
- Predictable annual subscription fees.
- Global connectivity and communal intelligence.
Cloud computing, put simply, is what you get when you place applications and computing resources on-demand, as accessible as power from the grid but hosted on the Web.
Who wins in this market? Many firms are playing, but I like VMWare (NYSE: VMW ) , salesforce.com (NYSE: CRM ) , and Google (Nasdaq: GOOG ) best. I won't repeat the arguments you've already heard.
What I'll say instead is that we've arrived at an inflection point where CIOs are under pressure to produce more efficiency with fewer dollars. Buy to own infrastructure isn't as compelling in this sort of spending environment. Renting is more interesting, especially if the digital accommodations are Park Avenue chic.
To be fair, it'll be a while before salesforce.com and Google take Manhattan, as it were. But even Dell sees this shift coming; it recently reupped a deal to run its global sales and an increasing portion of its other operations on salesforce.com's technology.
Just in time, you might say.