- S&P Global Ratings raised its global information technology (IT) spending forecast to 9.4%, up from 5.8% forecast in March 2021, as economic recovery continues to gain steam in the U.S. and elsewhere.
- We expect strength in most subsectors including hardware, enterprise software, and IT services. Semiconductors in particular are a standout because of very high demand offset by relatively fixed capacity.
- Our favorable view on IT spending is likely to lead to further positive ratings actions through the second half of 2021.
S&P Global Ratings now expects global IT spending to increase to 9.4% in 2021, up from 5.8% previously forecast, due to macroeconomic tailwinds and accelerating digital transformation by enterprises and consumers alike. This follows our global GDP forecast revision to 5.9% for 2021 from 5.5% on June 30, 2021, reflecting stronger performance nearly across the board in the first quarter and the faster reopenings in many countries than previously forecast due to the vaccine rollout. We expect that among the advanced economies, U.S. will outperform, growing 6.7% in 2021, due to a better vaccination outlook and two stimulus packages totaling $2.8 trillion, which have turbocharged the economic recovery. Our positive rating actions have outpaced negative by a roughly 4-to-1 ratio through July and we anticipate the stronger IT spending outlook may potentially support more positive rating actions through the second half of 2021. Below, we discuss key changes to our IT forecast.
|Global IT Growth Forecasts|
|Global GDP growth||3.2%||-3.4%||5.9%|
|- U.S. GDP Growth||2.3%||-3.5%||6.7%|
|- China GDP Growth||6.2%||2.3%||8.3%|
|- Eurozone GDP Growth||1.7%||-6.7%||4.4%|
|Global IT spending||4.2%||1.3%||9.4%|
|Mobile telecom equipment||3%||0%||3%|
|IT--Information technology. a--Actual. e--Estimate.|
PCs and smartphones continue to benefit from work-from-home tailwinds and increased reliance on connected devices through the pandemic. We now forecast that PC shipments will rise roughly 15% in 2021, significantly higher than our previous forecast of 8%, as consumer PC demand remains strong and enterprises are starting to ramp their IT spending. Despite the robust 13% unit growth in 2020 and over 50% growth in the first quarter of 2021, PC channel inventory remains low by historical standards and certain products, especially notebooks, will remain in short supply through the second half of the year due to component shortages. Our improved view of the PC industry supports our positive outlook revision for Lenovo Group Ltd. and CreditWatch positive placement for Dell Technologies Inc. during the year. That said, we expect unit growth to decelerate through 2021 with the potential for it to decline in 2022 as buyers digest their purchases.
We now expect smartphone shipments to rise about 6% in 2021 versus our prior forecast for 5% growth. The overall growth is partly driven by pent-up demand following delayed smartphone upgrades and replacements due to the COVID-19 impact last year. Growth appears to be broad-based, led by North America and India, while China's smartphone shipments, which account for slightly less than a quarter of total smartphone shipments globally, are anticipated to lag with flattish growth year over year. Since the restrictions on sales of technology to Huawei became effective in early 2020, the company's smartphone sales have declined precipitously. Most of its market share has pivoted to other Chinese smartphone vendors, and, to a lesser extent, Apple Inc. Component shortage is posing supply chain issues for hardware vendors, including Apple. However, we believe the constraint to Apple will be limited to the $3 billion-$4 billion of sales in Macs and iPads, and we also envision the sales to be pushed out as opposed to lost given customer loyalty. We expect Apple's iPhone sales will be largely unaffected given Apple's emphasis on its flagship iPhone sales and its strong customer relationship with chip manufacturer Taiwan Semiconductor Manufacturing Co. Ltd., which provides chips for Apple's mobile application processors.
As for enterprise and cloud-focused hardware products, we maintain our forecast for server units and external storage revenues to grow about 5% each in 2021. We believe hyperscale cloud providers, which make up over 30% of server demand, will continue to increase capital spending, albeit at a slower pace compared to 2020, to accommodate ongoing migration to the cloud. Enterprise spending will gradually improve throughout the year, and overall server spending should increase in the second half of the year versus the first half. At the same time, ongoing component shortages are likely to push out some server shipments into 2022. We expect external storage systems revenue will grow about 5% in 2021 following a 4% decline in 2020. Enterprise customers reduced storage spending in 2020 in favor of collaboration, security, and cloud spending in response to COVID-19. However, we expect the release of some pent-up demand in 2021 to result in above-trend growth as the pandemic accelerated the digitization of work and enterprises catch up on deferred on-premises storage investment. While COVID-19 has accelerated the shift to the cloud, many workloads will remain on premises; storage vendors' public cloud offerings are small at the moment, but they will become more meaningful over the coming years.
S&P Global Ratings' view of the semiconductor industry has consistently improved through 2021 as chip shortages continue to dominate the headlines. We now expect semiconductor spending to grow nearly 16% in 2021 versus our prior forecast of 9%, supported by strong demand from virtually all end markets and limited capacity at fabs and foundries. We expect nonmemory to grow nearly 13% given strong demand across applications such as analog, logic, and microcontrollers and fixed capacity to support solid pricing power. We continue to expect strong growth for semiconductor companies exposed to smartphones as 5G phone shipments should jump from about 200 million units in 2020 to about 500 million units in 2021. Cloud capital expenditures and industrial demand should remain strong for the foreseeable future. The automotive sector, which has suffered from chip shortages, is likely to start seeing some relief in second half of 2021 given foundry capacity expansions through 2021, but recently signed supplier agreements to ensure steady long-term chip supply will take time to reach the assembly line.
We expect memory sales to grow well above 20% as 5G phones and PCs require greater memory content, server demand from cloud providers remain solid, and solid state drive sales continue to gain traction. We expect DRAM average selling prices (ASPs) to strengthen through 2021 given disciplined supply among the three key manufacturers, while NAND ASP should stabilize, supporting strong revenue growth as consumption continues to accelerate. Our positive view of the memory environment over next several quarters supports recent positive outlook revisions for SK Hynix Inc. and Micron Technology Inc.
Despite our initial expectations, enterprise software spending hardly felt a pinch through the pandemic, growing about 9% in 2020, according to Gartner Inc. Initial belt tightening among enterprise customers led to a quick realization that digital transformation required greater software adoption to become more efficient and flexible. Software-as-a-service (SaaS) companies, which represent more than one-third of the total software market, continued to be one of the best-performing subsectors through COVID-19, with even large companies such as Salesforce.com Inc. and Adobe Inc. growing in excess of 15% in 2020. We upgraded both issuers to 'A+' from 'A' in recent months based on their resilient operating model and growing scale. With companies now focused more than ever on improving IT efficiencies, we now forecast enterprise software spending will increase to about 12% in 2021, an increase from 8% forecast in March. SaaS companies will continue to outperform, while legacy software providers such as Oracle Corp. and SAP SE will grow in the low- to mid-single-digit percents as their transition to subscription revenues continue.
We expect the IT services market, which is estimated to be about $1.5 trillion, to grow a robust 9% in 2021, significantly higher than 3% forecast in March. COVID-19 caused customers to delay large projects such as enterprise resource planning software implementations and consulting engagements that have longer payback periods in 2020. However, urgency for cloud adoption, digital transformation, and automation have taken center stage and we believe more enterprise customers will accelerate their cloud migration and digitalization journey, especially in infrastructure-as-a-service. Business environment seems to be strengthening with IT service providers Accenture reporting 12% year-over-year revenue growth and IBM reporting an 11% year-over-year growth in the June quarter and both companies discussing the need to invest in talent to meet the growing digital demands.
Improving IT Spending Portends Further Ratings Upside
We've seen an overwhelmingly positive rating bias among U.S.-based tech companies in 2021, with 52 positives versus 14 negative rating actions through July 2021. Positive rating actions in late 2020 and early 2021 were due in part to a reversal of negative rating actions taken during the pandemic. Our positive rating actions in recent months, however, reflect improving business fundamentals. Recent ratings or outlook revisions on large investment-grade issuers such as Salesforce.com and Adobe Inc. in the software segment, Accenture in the IT services segment, and Advanced Micro Devices Inc., Micron Technology Inc., and SK Hynix Inc. in the semiconductor segment all indicate not only strong performance through the pandemic but our forward-looking view that they will continue to broadly outperform the global GDP over the next several years. Our technology coverage, consisting of over 200 issuers, has a significant exposure to speculative-grade issuers, with those rated in the 'B' category accounting for half of the portfolio, but our ratio of positive to negative ratings bias has improved significantly through 2021 as well.
Lastly, stronger economic outlook and improving cash flow may open the door to more aggressive financial policies, especially higher share repurchases, but we do not expect this to lead to significant deviations from their current leverage profiles for companies such as Qualcomm Inc., NXP, and HP Inc. and view actions taken by Oracle and Seagate as an anomalies in an otherwise improving credit environment.
This report does not constitute a rating action.
|Primary Credit Analyst:||Andrew Chang, San Francisco + 1 (415) 371 5043;|
|Secondary Contacts:||David T Tsui, CFA, CPA, San Francisco + 1 415-371-5063;|
|Christian Frank, San Francisco + 1 (415) 371 5069;|
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