 From theCUBE Studios in Palo Alto in Boston, bringing you data-driven insights from theCUBE and ETR. This is Breaking Analysis with Dave Vellante. Last year in 2020, it was good to be in tech and even better to be in the cloud as organizations had to rely on remote cloud services to keep things running. We believe that tech spending will increase seven to 8% in 2021. But we don't expect investments in cloud computing to sharply attenuate when workers head back to the office. It's not a zero-sum game, and we believe that pent-up demand in on-prem data centers will complement those areas of high growth that we saw last year, namely cloud, AI, security, data, and automation. Hello everyone and welcome to this week's Wikibon Cube Insights powered by ETR. In this Breaking Analysis, we'll provide our take on the latest ETR COVID survey and share why we think the tech boom will continue well into the future. So let's take a look at the state of tech spending. Fitch ratings has upped its outlook for global GDP to 6.1% from January's 5.3% projection. We've always expected tech spending to outperform GDP by at least 100 to 200 basis points. So we think 2021 could see 8% growth for the tech sector. That's a massive swing from last year's 5% contraction and it's being powered by spending in North America, a return of small businesses and the massive fiscal stimulus injection from U.S.-led central bank actions. As we'll show you, the ETR survey data suggests that cloud spending is here to stay and a dollar spent back in the data center doesn't necessarily mean less spending on digital initiatives generally in cloud specifically. Moreover, we see pent up demand for core on-prem data center infrastructure, especially networking. Now one caveat is we continue to have concerns for the macro on-prem data storage sector. There are pockets of positivity, for example, pure storage seems to have accelerating momentum, but generally the data suggests the cloud and flash headroom continue to pressure spending on storage. Now we don't expect the stock market's current rotation out of tech. We don't expect that that changes the fundamental spending dynamic. We see cloud, AI and ML, RPA, cybersecurity and collaboration investments still hovering above that 40% net score. Actually cybersecurity is not quite there but it is a priority area for CIOs. We'll talk about that more later. And we expect that those high growth sectors will stay steady in ETR's April survey along with continued spending on application modernization in the form of containers. Now let me take a moment to comment on the recent action in tech stocks. If you've been following the market you know that the rate on the 10 year treasury note has been rising. This is important because the 10 years of benchmark and it affects other interest rates. As interest rates rise, high growth tech stocks, they become less attractive. And that's why there's been a rotation out of the big tech high flyer names of 2020. So why do high growth stocks become less attractive to investors when interest rates rise? Well, it's because investors are betting on the future value of cash flows for these companies. And when interest rates go up the future values of those cash flows shrink making the valuations less attractive. Let's take an example. Snowflake is a company with a higher revenue multiple than pretty much any other stock out there in the tech industry. Revenues of the company growing more than 100% last quarter and they're projected to have revenue of a billion dollars next year. Now on March 8th, Snowflake was valued at around $80 billion and it was trading at roughly 75X forward revenue. Today, toward the middle to end department of March Snowflake is valued at about 50 billion or roughly 45X forward revenue. So lower growth companies that throw off more cash today become more attractive in a rising rate climate because the cash they throw off today is more valuable than it was in a low rate environment. The cash is there today versus a high flying tech company where the cash is coming down the road and doesn't have to be discounted on a net present value basis. So the point is this is really about math not about fundamental changes in spending. Now the ETR spending data has shown consistent upward momentum and that cycle is continuing leading to our sanguine outlook for the sector. This chart here shows the progression of CIO expectations on spending over time relative to previous years. And you can see the steady growth in expectations each quarter hitting 6% growth in 2021 versus 2020 for the full year. ETR estimates show that then they do this with a 95% confidence level that spending is gonna be up between 5.1 to 6.8% this year. We are even more optimistic accounting for recent upward revisions in GDP and spending outside the purview of traditional IT which we think will be a tailwind due to digital initiatives and shadow tech spending. ETR covers some of that but it is really a CIO heavy survey. So there's some parts that we think can grow even faster than the ETR survey suggests. Now the positive spending outlook, it's broad based across virtually all industries that ETR tracks. Government spending leads the pack by a wide margin which probably gives you a little bit of heartburn. I know it does for me. Yikes. Healthcare is interesting. Perhaps due to pent up demand, healthcare has been so busy saving lives that it has some holes to fill. But look at the sectors at 5% or above. Only education really lags notably. Even energy which got crushed last year is showing a nice rebound. Now let's take a look at some of the strategies that organizations have employed during COVID and see how they've changed. Look, the picture is actually quite positive in our view. It shows the, this data shows the responses over five survey snapshots starting in March of 2020. Most people are still working from home. That really hasn't changed much. But we're finally seeing some loosening of the travel restrictions imposed last year. There's a notable drop in canceled business trips. It's still high but it's very promising trend. Quick aside, it looks like Mobile World Congress is happening in late June in Barcelona. The host of the conference just held a show in Shanghai and 20,000 attendees showed up. The Cube is planning to be there in Barcelona along with TelcoDR who took over Ericsson's 65,000 square foot space when Ericsson tapped out of the conference. We are good together. We're going to lay out the future of the digital telco in a hybrid physical slash virtual event with the ecosystem of telcos, cloud, 5G and software communities. We're very excited to be at the heart of reinventing the event experience for the coming decade. Okay, back to the data. Hiring freezes way down. Look at new IT deployments. You have flat from last quarter but big uptick from a year ago. Layoffs trending downward. That's really a positive. Hiring momentum is there. So really positive signs for tech in this data. Now let's take a look at the work from home, data survey data. We've been sharing this for several quarters now. Remember the data showed that pre-pandemic around 15 to 16% of employees worked remotely. And we had been sharing that CIOs expected that figure to slowly decline from the 70% pandemic levels and come into the spring and the summer and hovering in the 50% range. But then eventually landing in the mid-30s. Now the current survey shows 31%. So essentially it's exactly double from the pre-COVID levels. It's gonna be really interesting to see because across the board, organizations are reporting big increases in productivity as a result of how they've responded to COVID in the remote work practices and the infrastructure that's been put in place. And look, a lot of workers are expecting to stay remote. So we'll see where this actually lands. My personal feeling is the number is gonna be higher than the low 30s, perhaps well into the mid to upper 30s. Now let's take a look at the cloud and on-prem mix. So we're a little bit out in the limb here with our Cav-a-cake-and-eat-it-to scenario, meaning pan up demand for data center infrastructure on-prem is gonna combine with the productivity benefits of cloud and the digital imperative. So that means that technology budgets are gonna get a bigger piece of the overall spending pie relative to other initiatives, at least for the near term. ETR asked respondents about how the return to physical is gonna impact on-prem architectures and applications. You can see 63% of the respondents had a cloud-friendly answer as shown in the first two bars whereas 30% had an on-prem friendly answer as shown in the next three bars. Now, what stands out is that only 5% of respondents plan to increase their on-prem spend to above pre-COVID levels. Sargeet Shohal pinged me last night and asked me to jump into a clubhouse session with Martín Casado and the other guys from Andreessen Horowitz. They were having this conversation about the coming cloud backlash and how cloud-native companies are spending so much, too much in their opinion on AWS and other clouds. And at some point as they scale, they're gonna have to claw back technology infrastructure on-prem due to their AWS VIG. I don't know. This data, it certainly does not suggest that that is happening today. So the cloud vendors, they keep getting more volume. You would think they're gonna have better prices and better economies of scales than we'll see on-prem. And as we pointed out, the repatriation narrative that you hear from many on-prem vendors is kind of dubious. Look, if AWS, Azure and Google can't provide IT infrastructure and better security than I can on-prem, then something is amiss. Now, however, they are creating an oligopoly. And if they get too greedy and get hooked on the margin crack of cloud, they'd better be careful or they're gonna become the next regulated utility. So, it's gonna be interesting to see if the Andreessen scenario has legs. Maybe they have another agenda. Maybe a lot of their portfolio companies have ideas around doing things to help on-prem. All right, why are we so optimistic that we'll see a stronger 2021 on-prem spend if the cloud continues to command so much attention? Well, first, because nearly 20% of customers say there will be an uptick in on-prem spending. Second, we saw in 2020 that the big on-prem players, Dell, VMware, Oracle and SAP in particular and even IBM made it through okay. And they've managed to figure out how to work through the crisis. And finally, we think that the lines between on-prem and cloud and hybrid and cross-cloud and edge will blur over the next five years. We've talked about this a lot, that abstraction layer that we see coming and there's some real value opportunities there. It'll take some time. But we do see there that the traditional vendors are going to attack those new opportunities and create value across clouds and hybrid systems and out to the edge. Now, as those demarcation lines become more gray, a hybrid world is emerging that is going to require hardware and software investments that reduce latency and approximate to users, buildings and distributed infrastructure. So we see spending in certain key areas continuing to be strong across the board that will require connecting on-prem to cloud and edge workloads. Here's where its CIOs see the action. Asked to cite the technologies that will get the most attention in the next 12 months, these seven stood out among the rest. No surprise that cyber comes out as top priority with cloud pretty high as well. But interesting to see the uptick in collaboration and networking. The execs are seeing the importance of collaboration technologies for remote workers. No doubt there's lots of Microsoft Teams in that bar, but there's some pent up demand it seems for networking. We find that very interesting. Now, just to put this in context, in a spending context, we'll share a graphic from a previous breaking analysis episode. This chart shows the net score or spending momentum on a vertical axis and the market share or pervasiveness in the ETR dataset on the horizontal axis. The big four areas of spend momentum are cloud, ML and AI, containers and RPA. This is from the January survey and we don't expect a big change in the upcoming April data, we'll see. But these four stand out above the 40% line that we've highlighted, which to us is an indicator of elevated momentum. Now, note in the horizontal axis only cloud, cloud is the only sector that enjoys both greater than 60% market share on the X axis and is above the 40% net score line in the Y axis. So, even though security is a top priority as we were talking about earlier, it competes with other budget items, still right there, certainly on the horizontal axis, but it competes with other initiatives for that spend momentum. Okay, so key takeaways, 7% to 8% tech spending growth expected for 2021. Cloud is leading the charge, it's big and it has spending momentum so we don't expect a big rotation out of cloud back to on-prem. Having said that, we think on-prem will benefit from a return to a post isolation economy because of that pent up demand, but we caution, we think there are some headwinds particularly in the storage sector. The rotation away from tech in the stock market is not based on fundamental change in spending in our view or demand, rather it's stock market valuation math. So there should be some good buying opportunities for you in the coming months as money moves out of tech into those value stocks, but the market is very hard to predict. Look, 2020 was easy to make money, all you had to do was buy high growth and momentum tech stocks on dips. 2021, it's not that simple. So you got to do your homework and as we always like to stress, formulate a thesis and give it time to work for you, iterate and improve when you feel like it is not working for you, but stay current and be true to your strategy. Okay, that's it for today. Remember these episodes are all available as podcasts wherever you listen, so please subscribe. I publish weekly on siliconangle.com and wikibond.com and always appreciate the comments on LinkedIn. You can DM me at the Volante or email me at david.volante at siliconangle.com. Don't forget to check out ETR.plus where all the survey and data science action resides. Some really interesting things that they're about to launch, so do follow that. This is Dave Volante, thanks for watching the CUBE Insights powered by ETR. Good health to you, be safe and we'll see you next time.