Warning on American IT spending may be a bad sign for tech investors

• CDW Group worst performer in S&P 500 on Wednesday after profit warning
• Company flags slowdown in spending on IT in both equipment and software in the USA, to question investors’ faith in tech stocks
• Tech-laden NASDAQ is the best-performing major index worldwide in 2023 to date

“CDW Group may only be the 303^rd largest firm in America’s S&P 500 by market cap, but it was the heaviest faller in the benchmark index on Wednesday and its first-quarter profit warning could have big implications for investors around the globe,” says AJ Bell investment director Russ Mould. “The information technology provider flagged that overall IT spend in America could fall at a ‘high single digit rate’ in 2023. This feels consistent with the US Federal Reserve’s statement that America could suffer a mild recession this year, but it may be a nasty surprise to those investors who have piled into tech stocks looking for a place to hide – America’s tech-laden NASDAQ Composite is up 16.2% year-to-date and is the best performing major index worldwide.

Source: Refinitiv data. *Capital return in local currency.

“CDW has been a huge success since its flotation in 2013, which was priced at $17 a share. The shares closed at $165 on Wednesday, even after a 13% one-day swoon.

Source: Refinitiv data

“This is because annual revenues have surged to $23.7 billion from $10.1 billion and annual after-tax profits to $1.1 billion from $119 million.

Source: Company accounts, Zack's, NASDAQ, consensus analysts’ forecasts for 2023 and 2024 (before release of Q1 profit warning)

“Analysts had already pencilled in a 9% year-on-year drop in sales for Q1 2023 and a 3% decline in Q2, but they had also plugged in a big second-half recovery, so that full-year sales rose 3% for 2023 and then 6% for 2024. They also expected that to translate into 25% net income growth in 2023 and a further 10% advance in 2024.

Source: Company accounts, Zack's, NASDAQ, consensus analysts’ forecasts for 2023 and 2024 (before release of Q1 profit warning)

“Analysts and shareholders will now have to wait until the release of the first-quarter results on 3 May and see what guidance, if any, chair and chief executive Christine A. Leahy feels able to offer about Q2 and 2023 as a whole.

“Though after the profit warning those estimates look over-optimistic, in what could be a warning to investors who are relying on a strong second half to compensate for a weak first six months of 2023, or on tech stocks more generally.

“Ms. Leahy flagged particular weakness in what she termed ‘transactional products’ – hardware such as PCs, displays, printers and networking equipment – but also admitted the software and IT solutions had undershot expectations between January and March as well. The biggest shortfall came from commercial customers (companies) and it will be interesting to see how healthcare, education and government spending pans out when more details are revealed in early May. Given the precarious nature of the US government’s finances, and the increasingly heated debate over how to best tackle the federal debt and adjust the debt ceiling, it may be unwise to expect a rapid increase in government spending in the rest of 2023.”

Source: Refinitiv data