Key Takeaways
- We expect information technology (IT) spending to accelerate in 2024 as the macroeconomic outlook is now less cautious than the budgeting cycle than last year.
- Waning cloud customer spending rationalization, interest in artificial intelligence (AI), and an improving ad spending market will support accelerating cloud revenue and capital expenditure (capex) growth.
- The memory market is emerging from its deep downturn more strongly than anticipated, but we don't expect mid-cycle margins for a few more quarters.
- Weak demand in select markets, including communications infrastructure, is pressuring speculative-grade ratings in the U.S. technology sector. We think debt markets will support refinancing and mergers and acquisition (M&A) transactions.
- A weak macroeconomic environment, soft demand, or idiosyncratic business factors caused several downgrades to the 'CCC' category in the U.S. technology sector over the past few months.
We expect IT spending growth to accelerate in 2024 because we believe the fear of recession hindered enterprise technology budgets in 2023. Enterprises have important spending priorities like AI, cloud, and PC upgrades. We forecast spending on public cloud platforms will have a better year as enterprises spend more freely on workload migrations and take advantage of their AI offerings. Weak demand in certain markets like communications infrastructure provoked several negative rating actions in the speculative-grade category last quarter. We expect more debt market transactions throughout 2024 to address maturities and support acquisitions.
A weak macroeconomic environment, soft demand, or idiosyncratic business factors, as well as weak wireless and cable investment spending, provoked several downgrades in 2023. However, easing interest burdens and a more confident macroeconomic picture could allow some to pull themselves out of the 'CCC' category eventually. We also expect more M&A activity as acquirers gain confidence in a more constructive macroeconomic environment and as debt markets open up.
IT Spending Is Turning A Corner
We expect global IT spending to grow 8% in 2024 (see Industry Credit Outlook 2024: Technology, published Jan. 9, 2024), up from 4% in 2023, when it lagged global and U.S. nominal GDP growth by multiple percentage points due to a return to growth after major inventory corrections in PCs, smartphones, and general-purpose data center equipment and components. We expect a less cautious budgeting cycle in 2024. Entering 2023, market participants expected high interest rates to persist to mitigate inflation, leading to a mild recession; in response, enterprises made conservative IT spending plans.
As we moved through the year, markets gained confidence in a soft landing, but enterprises stuck to their original plans. Now, as technology customers have more confidence in a solid macroeconomic environment, we expect their budgets to grow faster than last year with AI, cloud, and PC upgrades as the top spending priorities.
AI capabilities, including copilots or assistants, will be key to deliver more value to customers and for providers to capture more revenue over the next 12-24 months. We expect edge AI products like PCs and smartphones to emerge roughly over the same time frame as device makers are eager to drive a replacement cycle with higher average selling prices. We believe AI spending will expand the IT addressable market, but it could also crowd out other priorities, as we saw in hyperscale data center spending in 2023.
Global PC unit shipments narrowed their year-over-year declines for the third consecutive quarter to 3% in the fourth quarter. PC inventory has reached normal levels after dropping to the mid-teens percent area in each of the last two years,. We expect flat to low-single-digit percent growth in the first half of 2024, with demand gaining momentum in the second half.
We remain confident that our forecast for 4% unit growth in 2024 will hold up to modest macroeconomic pressure given the installed base is old and will now need to be refreshed. A large number of PCs purchased very early during the COVID-19 pandemic (beginning in 2020) will turn four years old in 2024. We expect support for Windows 10 will end in 2025, becoming a catalyst for replacements in 2024. Finally, AI PCs may begin coming to market as early as the second half of 2024, which early adopters will be eager to buy.
Cloud Revenue And Capex Poised For Reacceleration On Waning Customer Optimizations And Excitement For AI
The cloud players delivered a third consecutive quarter of stable revenue growth, and we expect growth will accelerate in 2024. We believe customers' consolidation of their cloud spend in 2023 because of cautious IT budgets is now mostly finished. We forecast the resumption of new workload migration and high interest in AI offerings will support modest acceleration in 2024.
Last quarter, Microsoft Azure grew 28% year over year in constant currency, the same as the prior quarter, and it gave guidance that the next quarter's growth would be stable relative to the December quarter. AI accelerated Azure's revenue growth by 6%, up from 3% during the prior quarter. Amazon Web Services (AWS) grew 13% year over year, up from 12% the prior quarter, and it too pointed to rising AI revenue. Google Cloud grew nearly 26%, more than 3% higher than the prior quarter. In addition, the ad market is improving, with Meta posting revenue up 25% year over year in the fourth quarter, meaningfully higher than the 7% from the first half, with similar growth expected next quarter. Google also benefited from the improving ad market but to a more moderate extent than Meta.
Given these improving revenue growth prospects in 2024, we expect cloud capital spending to accelerate. Together, Microsoft, Google, and Meta grew capital spending 13% in 2023, despite Meta's spending being down 13%. We expect cloud investment spending to accelerate to near 30% in 2024, the strongest growth since 2018, helped by Meta returning to strong double-digit percent growth.
Microsoft indicated its capex would increase materially on a sequential basis next quarter after growing an eye-popping 55% year over year this last quarter. Google said its 2024 capex would be notably larger than in 2023. Meta raised the high end of its 2024 capex guidance by $2 billion and indicated that AI would require increasing infrastructure investment beyond 2024. Amazon pointed to higher capex in 2024 to support AWS growth, including generative AI and large language models.
We expect this spending to continue boosting NVIDIA, for which we forecast 45% revenue growth in 2024, but that the benefits will expand to more data center chip and component vendors this year. Advanced Micro Devices raised its 2024 data center GPU revenue target to $3.5 billion from $2 billion. We also expect cloud spending for both AI and general-purpose applications to benefit makers of CPUs, hard disk drives, networking, memory, and ASICs, more weighted toward the second half of 2024.
Semiconductors Are On Track For A Strong Rebound In 2024 Despite Industrial And Automotive End Market Corrections
We expect global semiconductor industry revenue to grow 14% in 2024, led by a strong recovery in memory and a continued robust performance by NVIDIA after an 8% decline 2023. Excluding memory, growth would be 8% (3% after removing NVIDIA). This is due to the stabilization in the PC, smartphone, and general-purpose data center markets, offset by a weak industrial outlook. The automotive market is starting to weaken, evidenced by results and guidance from Texas Instruments, Microchip Technology, and NXP, but we expect it to hold up better than industrial markets. Demand for NVIDIA's GPUs to power AI training workloads continues to drive market growth, but we expect spending for inferencing (applying AI models to specific cases) to emerge more prominently in 2024 and for the benefits to be more broadly shared.
In the fourth quarter of 2023, total semiconductor revenues were up 12%. Excluding memory, they were up 8%, similar to our expectations for 2024. GPUs continue their very strong, AI-driven performance. Microprocessors saw strong results in the fourth quarter on inventory restocking for PCs and smartphones, and we expect that strength to continue through 2024, particularly in the second half. Sales in China also showed some early signs of recovery, with revenue up 5% in December compared with November, after being down 14% for all of 2023, which we believe points to signs of recovery in smartphones.
However, analog remained in the fourth quarter of a downturn owing to industrial demand weakness driven by the market's sensitivity to macroeconomic uncertainty and an associated inventory correction. Microcontrollers entered a slight correction in the fourth quarter of 2023 that we expect to worsen in the first quarter of 2024, also driven by industrial weakness. For the first quarter, Microchip Technology indicated its March quarter revenue will decrease 41% year over year and 25% sequentially, indicating the depth and rapid acceleration of the correction in this category.
Even the durable automotive market cannot escape a reversal, although we expect its correction will be much less severe than industrial's. We believe the trend toward increasing content for vehicle electrification and computing remains intact, but the inventory of vehicles and chips has built up and needs to clear. In the fourth quarter, Texas Instrument's auto revenue was down in the mid-single-digit percent area sequentially, and its first-quarter guidance suggests to us a more negative outcome. NXP is performing slightly better but directionally similar--its auto revenue was flat sequentially in the fourth quarter of 2023, and it expects it decrease in the mid-single-digit percent area next quarter.
Memory Emerging From The Doldrums
Both DRAM and NAND posted solid recovery in the fourth quarter, with revenue up 25% quarter over quarter and above 30% year over year. This is the first quarter of meaningful year-over-year growth in the last seven quarters. The last quarter saw very strong memory volume as customers sought to lock in prices before further hikes next quarter. Smartphone and PC markets strengthened last quarter, and their inventories are now at normal levels. The revenue level was consistent with mid-cycle conditions. However, margins are still behind but are improving. We don't expect DRAM to get back to mid-cycle margins until the second half of 2024 at the earliest, while NAND will take until 2025. Nonetheless, memory margins are on a strong, upward trajectory after production and capex cuts in 2023.
Production cuts from 2023 remain in place, as indicated by strong price increases in the fourth quarter. We expect this to continue in the first quarter of 2024, with modest volume growth in the next quarter. Suppliers continue to prioritize repairing profitability over market share. We expect solid price increases in the first half of 2024 on inventory restocking demand, which will moderate in the second half. We anticipate suppliers will bring back idled capacity gradually, but it won't all come back because they repurposed some of the capacity dedicated to lagging nodes to leading edge nodes. In fact, the price increases have been stronger for legacy products, which partially repaired profitability but also increased penetration of leading products given narrowing price premiums. We believe significant capex cuts in 2023 and modest growth expected for 2024 will keep supply from getting ahead of demand over the next several quarters.
Data center AI is a strong catalyst for DRAM that will support growth and profitability over the next few quarters given greater volumes of data processing. AI might boost NAND if use cases create more high-performance data storage needs, but the impact is less certain at this point. Edge AI in smartphones and PCs will become more of a driver over the next 12-24 months as first-generation products roll out in volume over that time.
Weak Demand Caused Several Downgrades, A Weak Communications Market Caused Other Negative Actions
A weak macroeconomic environment, soft demand, or idiosyncratic business factors caused several downgrades to the 'CCC' category, including for CommScope Holding Co. Inc., GoTo Group Inc., Veritas Holdings Ltd., Atlas Midco Inc. (d.b.a. Alvaria), Magenta Buyer LLC (d.b.a. Trellix), and Electronics for Imaging Inc. In addition, we downgraded Astra Acquisition Corp. (d.b.a. Anthology) within the 'CCC' category to CCC/Negative. While higher rates were a compounding factor, the primary drivers for these downgrades were weakening business trends including weak end markets (CommScope, Alvaria, Verita), vigorous competition (GoTo Group), revenue model transitions (Vertias and Trellix), and bad acquisitions (Anthology's acquisition of Blackboard).
Weak wireless and cable investment spending provoked several downgrades, including CommScope, Viavi Solutions Inc., and MaxLinear Inc. We also revised our outlook on Coherent Corp. to negative. We expect the weakness in wireless to persist because it is on the downside of the 5G investment cycle, particularly in North America, and cable spending will remain muted until government support for underserved broadband customers begins in the second half of 2024 or in 2025.
Other notable actions include our upgrade of Broadcom Inc. by one notch to BBB/Stable/A-2 due to an improved view of the business after it acquired VMWare and kept a meaningful cushion to accommodate future acquisitions. Finally, we placed our ratings on Western Digital Corp. on CreditWatch with negative implications upon its announcement that it will spin off its flash business to shareholders, potentially leaving the entire debt load with the hard disk business, which could cause a multiple-notch downgrade.
Looking forward, interest rates remain high and maturities are drawing nearer after choppy markets precluded normal refinancing activity in 2023. However, debt markets are opening up as confidence in a soft landing has increased and rates have stabilized, allowing issuers to address maturities. Rate cuts are in view for 2024, which would ease interest burdens. A more confident macroeconomic picture could shore up the sustainability of issuers' capital structures, allowing some to pull themselves out of the 'CCC' category eventually.
We also expect more M&A activity as acquirers gain confidence in a more constructive macroeconomic environment and debt markets open up, like we've seen from Hewlett Packard Enterprise Co.'s pending acquisition of Juniper Networks and Synopsys' pending deal for Ansys. We expect AI will be a significant new acquisition space over the next several years, with incumbents looking to buttress their product offerings with AI capabilities before competitors can do the same or insurgents take meaningful market share.
This article does not constitute a rating action.
| Primary Credit Analyst: | Christian Frank, San Francisco + 1 (415) 371 5069; christian.frank@spglobal.com |
| Secondary Contact: | David T Tsui, CFA, CPA, San Francisco + 1 415-371-5063; david.tsui@spglobal.com |
| Research Assistant: | Saurabh B Tarale, Pune |
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