Monday, 15 April 2013

Technology – taking a pause

Last quarter saw 'the steepest decline ever' in PC sales according to research company IDC as mobile devices continued to flourish. Microsoft’s shares came off as a result. Of course, mobile devices cannot entirely replace PCs and Microsoft’s profits are not completely tied to PC sales. Support for Windows XP is ending next year, which will force companies to upgrade to Windows 7 or 8 this year, generating significant profits for Microsoft without a matching increase in PC numbers.

The US technology sector was also held back by Apple in Q1, still the world’s largest company by market capitalisation (Exxon Mobil briefly retook the top spot) and still a key index constituent. Continued fears over margins made on new devices (the iPad Mini), software problems (Apple Maps), the resulting management shakeup, as well as increasingly apparent competitive pressures in the form of Samsung and low-priced tablets, were enough to send the shares down a further 19% in Q1 2013.

Asian technology fared better but still managed to underperform the wider market. In Europe, the picture was significantly brighter, with both software and hardware outperforming. SAP, the largest company in the European index, continued to make ground but at a slower rate than expected, due to extra spend on innovation and a 13% increase in workforce. SAP has the most users in the cloud (four times the number of nearest its competitor), which is where the majority of global software growth has come from in recent times. 

SAP was relatively quick to appreciate this trend and has made a number of key acquisitions in this area. The ability to sell integrated cloud solutions under the SAP brand is convincing more companies to move to the cloud, which is partially accelerating SAP’s traditional on-premises software rather than just cannibalising it. We continue to watch the development of cloud computing with interest and think SAP may be a way to play it.

Ruairidh Finlayson
Equity Analyst

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