Execs Are High on Digital Tech Even As Investors Sour
Corporate managers are growing more bullish for tech spending expansion, even as investors bet on contraction.
A new corporate leader survey from Gartner, Inc. (NYSE: IT) published on Tuesday reveals enterprises are coming out of the pandemic with a renewed focus on digital transformation and tech spending.
Buying tech stocks has become taboo. Investment managers have been advised to reduce exposure to the sector under the guise that corporate managers will cut capital expenditure (capex) for tech gear once workers return to office towers. The Gartner data flies in the face of that thinking.
When chief executives were asked about strategic corporate priorities, 20% cited digitalization, up from 17% in 2019. And a majority of CEOs said that digital transformation is the top ask of their chief information officers.
The distinction might have something to do with the changing nature of commerce. The pandemic shined a bright light on digital fitness. Companies without developed digital strategies were left far behind those with ongoing e-commerce, supply chain, logistic and cybersecurity systems in place.
Forward-looking companies like The Home Depot, Inc. (HD), Best Buy Co., Inc. (NYSE: BBY) and McDonald’s Corp. (NYSE: MCD) emerged from the pandemic as far more powerful franchises … and it wasn’t a fluke. Managers spent early and wisely to make it so.
Now, the rest of the corporate world is playing catch-up.
Many are also wrestling with workforces that have had a taste of the work-from-home (WFH) experience. The data is in: Employees like WFH. Getting everyone back into the office may be a tough ask.
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Gartner found that 80% of CEOs believe the corporate world is at the beginning of a societal behavior change with more WFH, less business travel and more customer service within digital channels. This may involve social media, artificial intelligence chatbots or messaging via text.
The finding echoes sentiments from leading tech executives. Sales growth has been brisk across the board for companies that make digital platforms to help corporations connect seamlessly with customers, build better systems to service supply chains and keep employee communications safe. Despite this, share prices for many tech businesses have been eviscerated.
There is a disconnect between investor sentiment and corporate enthusiasm. It’s an opportunity for investors.
Growth investors should consider playing this trend by looking at Twilio Inc. (NYSE: TWLO) and ServiceNow, Inc. (NYSE: NOW).
Twilio is a wonderful business. The San Francisco-based company makes application programming interfaces (APIs), the tiny building blocks of modern computer programming. APIs make it easy for companies to send text messages to verify accounts, help customers deposit checks by taking a photo with their smartphone and many other applications. And Twilio gets a small fee every time one of its APIs is accessed. It’s a big business that is growing fast.
The company reported last week that first-quarter sales surged to $590 million, up 62% and well ahead of previous guidance. A corporate presentation showed the company now has 235,000 customers.
Surprisingly, it didn’t matter. Twilio shares sank 9.4% following the earnings report. Investors feared the stock was priced for perfection, according to a report at CNBC.
ServiceNow shares were met with the same fate following its first-quarter report. The investor presentation showed sales grew 30% to almost $1.4 billion as corporate customers expanded the use of the cloud-based platform. Shares fell 4%. They are down 17% in the quarter.
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The Now platform is in use by about 6,900 corporations. The software is essentially an operating system for businesses. It helps firms seamlessly manage workflows across IT, employees, customer operations and in-house applications. Everything is connected across the entire enterprise, and it is all digital. Better still, corporate customers love the software.
The subscription renewal rate has been above 95% for a decade.
The inherent business strengths of Twilio and ServiceNow are being overlooked by investors.
The perception is the cloud growth story will dissipate as the economy reopens. The Gartner research suggests that is simply not true. Tech spending is here to stay and the pandemic accelerated the digital transformation that was already in place.
Twilio and ServiceNow shares are down 9.6% and 12.5%, respectively, year to date.
Longer-term investors should consider using recent weakness to accumulate positions.
Best wishes,
Jon D. Markman
