Why tech industry profits will be squeezed this year
Tech earnings season starts in earnest Thursday with Intel, so investors should buckle up for what might be a rough start to the year. The reason?
To put it plainly, profits are under assault across the tech landscape.
According to Gartner, global IT spending will grow in 2014, but profits will be lower as analytics, software and lower-margin services grow faster than traditionally profitable areas like telecom equipment.
This, however, is just one part of the overall margin challenge. There are concerns in the consumer space, too.
Intel CEO Brian Krzanich said he expects the next generation of computing devices—a category that includes "wearables" like smart watches and home medical devices—to become 10 times larger than the smartphone market, but less profitably. Qualcomm CEO Paul Jacobs seemed to support this view during an interview at the Consumer Electronics Show last week.
Meanwhile, previously invincible stocks like Qualcomm and Samsung have shown some vulnerability over the past few months, for a common reason: Growth at the high end of the smartphone market is slowing and competition at the low end is brutal, where chipset suppliers like MediaTek are offering serviceable product for very little money.
Exacerbating all this, tech giants are less likely than ever to stay in their expected lanes.
Google is making tablets and phones at razor-thin margins; After failing to make a dent in the smartphone market with its flagship Moto X this fall, Google's Motorola unit has hitched its wagon to the Moto G, a downmarket cousin. (That's likely to pressure margins at Samsung and Google itself.) Samsung has said it intends to take the tablet unit crown from Apple in 2014, a lofty goal that's sure to require aggressive pricing.
We've been here before, sort of. Back in the early 2000s Dell initiated several rounds of PC price wars that gutted Gateway and forced Hewlett-Packard to snuggle up to Compaq. (IBM left the PC business altogether.)
Consolidation helped for a while, but the real answer? New markets. Apple's iPod and iTunes led to the smartphone, which led to an entirely new model for consumer computing.
It's not yet clear what those new markets might be, but unless emerging markets perk up again, bottom-line growth is likely to be a tough thing for tech this year.