Investment bank Goldman Sachs just released its "Americas: 2009 Software Outlook" report, and it promises near-term pain for an already struggling technology industry:
The worst of the IT-spending slowdown likely remains in front of us, as we start the clock on slashed 2009 budgets. We forecast 0 percent revenue growth for our group, below consensus at 5 percent, and 1 percent earnings growth, below Street at 2 percent.
In other words, things are going to get worse before they get better.
For Goldman, this means that it is recommending stocks that it believes enterprise customers will buy into: defensive/large-cap stocks like Microsoft and Oracle, as well as companies that suggest "strong cost-cutting discipline and mission-critical product sets" like BMC, CA, and Symantec. Why? Because these are the safe bets, among other reasons:
We expect the "Big 5" software companies (Microsoft, Oracle, SAP, Symantec, CA) to benefit from more defensive revenue streams due to critical nature of functions, "stickier" maintenance, stronger negotiating leverage, and a likely spending consolidation to larger vendors. Hence, we assume 0 percent growth for this group in 2009.
The other reason called out in the report is that recessionary pressures will push CIOs to consolidate their IT spending into the big "ecosystem" vendors, rather than buying best of breed. If true, this will likely hurt open source, even as its lower costs help.
Even so, I'm looking at a sales pipeline for Alfresco Software, my employer, that is three times anything we've seen in the past, which suggests to me that the recession may be very good for open source, though more data (and time) is necessary to prove out this thesis.
Interestingly, Goldman sees Salesforce.com getting a lower share of IT spending in 2009, and it has slapped a "Sell" rating on its stock. I suspect that Goldman may be off in this, given that SaaS is a great way to adopt IT, at a measured pace with diminished risk. But the point is well-taken on spending with established vendors, though this may ultimately benefit Salesforce.com, as it's the biggest player in SaaS.
The only positive in a recession is that we'll see a serious separation of wheat from chaff in IT vendors. I continue to believe that open source will do well through the downturn (indeed, Goldman calls out Red Hat as a winner in the downturn, able to withstand downward pricing pressure), as well as SaaS, though I also concede to Goldman's point that a large portion of IT budgets will find their way to the industry's dominant vendors.