The coronavirus or Covid-19 (a poor name) is beginning to impact tech. Mobile World Congress in Barcelona was cancelled after high-profile vendors bailed. More important, Chinese demand and the Asian supply chain are being affected. Alibaba’s CEO called it a “black swan event.” On p2 we provide quotes from recent earnings calls and conference presentations. Skyworks points out that a Sep-Dec outbreak would have been worse and that factories run at 50% utilization anyway in March-June. Other companies like Applied Materials are moderately reducing guidance, “de-risking” numbers because of the virus. Is it enough?
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Last week we highlighted the overlap between energy and technology; here we discuss the intersection of building and technology with Don Reid, EVP of Business Development at Sustainable Living Partners LLC. Sustainable Living's (SLI) mission is to transform the real estate development and construction industries, which have not seen significant technological innovation for over 100 years. The company is delivering an enhanced urban living experience to the multifamily housing market at a lower cost and with significantly reduced energy and water footprint.
Our survey of 50 value-added resellers includes 25 US, 20 Europe, and 5 Asia. Most responses were taken after Jan 7, which is when Coronavirus hit the news. The ramifications of the virus are yet to play out and may be more negative than indicated by responses. Still, no Asian VARs see their 1Q business as better than 1Q/19. See our sister VAR Insights report out today for demand anecdotes.
We spoke with VAR contacts in preparation for the second wave of earnings and to get an early read on Coronavirus impact. See our companion VAR Survey out today for tabulated global VAR views.
Wolfe Research Tech Strategist, Steve Milunovich, hosted a webcast with Don Reid, EVP Business Development at Sustainable Living Partners LLC. PropTech uses digital innovation to address the needs of the property industry. His company is creating an innovation platform, benefiting from ecosystem network effects. Sustainable Living's mission is to transform the real estate development and construction industries, which have not seen significant technological innovation for over 100 years. In doing so, the company is delivering an enhanced urban living experience to the multi-family housing market at a lower cost and with a significantly reduced energy and water footprint.
Tech has had a small pullback so far; we remain market weight given China risk and high valuations. The Wolfe Tech Universe rose 3.1% the past week, in-line with the S&P 500’s 3.2% gain. Semis rebounded though year-to-date there has been sector rotation away from Semis (+1%) and Hardware (-1%) to Software (+10%) and Internet (+7%; Exhibits 1-2). Top performers included Ingenico (+25%), Semi Manufacturing (+21%), Zoom (+16%), Nuance (+16%), and Lumentum (+15%). Laggards were NortonLifeLock (-30%), Micro Focus (-25%), ON Semi (-12%), Ubiquiti (-11%), and Take-Two (-10%).
We heard from polymath Mark Mills, who is a senior fellow at the Manhattan Institute and a faculty fellow at Northwestern University's McCormick School of Engineering and Applied Science. In his latest book Digital Cathedrals, Mark compares today’s cloud data centers to yesteryear’s cathedrals as well as to skyscrapers. In fact, there is more square footage in enterprise data centers than all skyscrapers, and data center rent per square foot is 5x higher. The cloud will be the largest infrastructure ever built by man.
The secular trend toward public cloud shows no sign of abating. Combined revenue of the top four US clouds increased by 36% YoY in 4Q, about the same as the prior three quarters. AWS grew 37% and added almost $10bn for the year at a 26% operating margin. Although the revenue gap with AWS increased, Azure gained share in growing 64% for the year, even slightly accelerating in 4Q. Furthermore, adding SaaS to Microsoft’s IaaS/PaaS revenue makes it the all-around cloud leader at just under $45bn. IBM’s GTS cloud segment slowed to 10% though the acquisition of Red Hat could have a beneficial effect going forward with the architect of the deal becoming CEO.
Wolfe Research Tech Strategist, Steve Milunovich, hosted a webcast with Mark Mills, Senior Fellow at the Manhattan Institute and venture investor. Mark has unique insights into the intersection of tech and energy. His latest book Digital Cathedrals examines the cloud's electricity usage. His book The Bottomless Well is one of the best on energy, including skepticism of cleantech.
We remain market weight tech; there has been an important sector rotation away from Semis and Hardware toward Software. Economic indicators are improving but likely will be offset by Coronavirus effects near term.
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