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During the past 20 years, the author has watch China move from being a developing country into an industrial superpower
Money Moves, 5/24: Chocomize Co-Founder Fabian Kaempfer talks with Bloomberg’s Deirdre Bolton about the business of customizing chocolate
The president's campaign has a new rule—no cell phones allowed
In honor of remote control inventor Eugene Polley, we recognize other influential but neglected inventors who have felt the sting of stolen glory
Adam Johnson talks about what trading vehicles can help you earn more money per trade
The Italian automaker and others are adding hybrid technology to elite cars
The storied bridge that links San Francisco and Marin County changed the face of California
Schools cultivate ties with startups before they're big successes
Dave McClure's traveling venture capital show scours the world for promising startups
Get Four
|  | DECEMBER 23, 2004
Tech Outlook 2005 -- Part 1 [Page 4 of 4] HIGH SCORERS. Other picks in systems software include Sybase (SY; buy; $19), and Oracle (ORCL; buy; $14). SAP AG (SAP; buy; $44) is the only application software company that we rank as a buy. We believe that SAP continues to benefit from enhanced product offerings, in addition to the protracted Oracle/PeopleSoft (PSFT; $26) takeover battle. In home-entertainment software, we continue to like Electronic Arts (ERTS; buy; $62), and Activision (ATVI; buy; $19), because of their market leadership, strong balance sheets, and diversified brand libraries. Zaineb Bokhari, specialty software Extracting value from existing corporate investment in information technology will be a key theme for 2005, in our view. As widely reported, the freewheeling spending in the mid-90s, particularly in anticipation of Y2K, is a thing of the past. Shelf-ware issues still persist and return on investments (ROI) from hefty spending on customer relationship management (CRM) and enterprise resource planning (ERP) applications has been slow to materialize. IT is fast evolving from being viewed as a cost to a revenue/productivity enhancer, driven largely by the need of chief investment officers and other IT executives to justify spending to meet operational goals. This has resulted in spending on an as-needed basis and a preference among customers for smaller deal sizes or subscription-based licenses. In this tight corporate spending environment, we look for a shift in emphasis favoring technology companies whose products either extend the value of the IT investment or enhance the ability of decisionmakers to allocate resources effectively. Two software segments that play to this theme are systems management software (SMS) and business intelligence (BI). We expect mid-single-digit revenue growth for the SMS companies that derive a significant portion of sales from mainframes, such as BMC Software (BMC; hold; $18), Computer Associates (CA; hold; $31), and Compuware (CPWR; hold; $6). While these companies are attempting to rejuvenate growth by entering new markets like security, asset management, and application-lifecycle management, we believe it will be difficult for them to gain critical mass in these growth areas because of their size and competition from super-niche outfits. INTELLIGENCE AGENTS. We expect SMS vendors to use their sizable cash and balance sheets for acquisitions or mergers and fill out their product offerings in the next several quarters. Vendors with attractive customer bases in asset-management and security administration are likely targets, in our opinion. The importance of mainframe revenue, however, isn't likely to diminish soon and has come under attack. The fiercest competitor, in our view is IBM, which has leveraged its natural advantage over the SMS vendors by bundling hardware, software, and services and competing on price to lower its customers' total cost of ownership. Given our outlook for moderate growth and increasing competitive pressure, we have hold opinions on shares of mainframe-centric SMS vendors BMC Software, Computer Associates, and Compuware. Business-intelligence software involves reporting and query, data integration, and performance analysis. While the overall BI area is growing at a 5% long-term rate, according to market researcher IDC, it is under-penetrated, in our view. Market leaders Business Objects (BOBJ; hold; $25) and Cognos (COGN; buy; $43) have been increasing share in the mid-teens, due largely to acquisitions and growing business momentum. READY FOR EMBEDDING. We like the fundamentals of BI because it coincides with our view that technology with lower price tags, quick deployments, and immediate ROI will be less vulnerable to spending slowdowns. The key to success and ultimately greater revenue streams, in our view, is for corporate customers to standardize on a single BI product. Standardization affords vendors the opportunity to cross-sell and up-sell into an organization and makes competitive replacements difficult. Business Objects and Cognos are pursuing vastly different strategies to achieve the same goal. Business Objects is employing a "built to embed" strategy in which it offers BI tools that allow users to build custom software, and relies heavily on partners like PeopleSoft and SAP to sell restricted versions of its products. Cognos, which we recently upgraded to buy, offers a packaged application, which is ready to go out of the box. While it may ultimately boil down to a build-vs.-buy decision, we think it's too early to say which strategy will ultimately win or if there's room for both to be successful. Other large software makers see the attractiveness of BI. Oracle has built additional BI capabilities into its Oracle 10g release, and Microsoft has enhanced the reporting functionalities of its SQL server. We look for continued consolidation in the BI area in 2005 and for database vendors to acquire smaller-niche companies specializing in the data integration and query and reporting areas, as we view it as a natural extension to their product functionality. We believe the positive business trends discussed above are adequately reflected in current stock valuations, and we have hold opinions on shares of Business Objects and Cognos. Note: S&P analysts have no stock ownership or financial interest in any of the companies in their coverage area. All of the views expressed accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed. Price charts and required disclosures for all STARS-ranked companies can be found at www.spsecurities.com.
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