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Tech

Two companies will suck up half of tech’s profits in 2018

By
Emily Bary, Marketwatch
Published Dec. 13, 2017
Updated Dec. 13, 2017, 1:59 p.m. ET

On the whole, tech giants are poised to deliver “stable” revenue and profit in 2018, but Apple and Microsoft are expected to be the main reasons for continued earnings growth.

According to an analysis from Moody’s released Tuesday, big tech is projected to boost revenue by 3.5 percent to 4.5 percent next year, with Apple and Microsoft fueling a big portion of that expansion. Excluding those two companies, the analysts at Moody’s predict revenue growth of 2.5 percent to 3.5 percent.

They anticipate a similar trend in terms of operating profit, projecting that Apple and Microsoft could account for half of all profits for their basket of 24 tech stocks, which includes a variety of mature hardware companies and enterprise software firms. Apple has been known to command an extreme share of the smartphone market’s profit and recently finished its 2017 fiscal year with annual net income of more than $48 billion, while Microsoft capitalized on its software offerings to increase net income 16 percent to nearly $26 billion in the fiscal year it completed last summer.

“Smartphones and software will drive the most growth, with Apple and Microsoft having an outsized impact,” Stephen Sohn, a senior vice president at Moody’s, said in a news release.

The firm sees software companies like Microsoft, Oracle, Adobe and SAP delivering more than 5 percent revenue growth next year. Smartphone companies, like Apple, could boost revenue between 1 percent and 5 percent in the first half of next year and upward of 5 percent in the second half.

Overall, growth in information technology spending fell in the earlier part of the decade, but it bounced back in 2017, and Moody’s expects the recovery to continue in 2018. While PC shipments could extend their decline, mobile spending is projected to increase, thanks to Apple’s iPhone X and iPhone 8 models.

“Mobile remains one of few hardware-oriented segments that is not in outright decline,” the Moody’s analysts wrote in a report.

They see a “tailwind” for the software industry as companies move from legacy systems to the cloud.

“Cloud revenues now more than offset the declines in license revenues,” the analysts wrote.

Software firms have been big winners in 2017 as well. Shares of Microsoft are up 38 percent so far this year, compared with 30 percent for SAP, 31 percent for Oracle, and 67 percent for Adobe. Apple, meanwhile, has capitalized on the iPhone X excitement for its own big gains, with shares up 48 percent in 2017. The S&P 500 has gained 19 percent, while the Dow Jones Industrial Average is up 24 percent.