CITIC Securities: IT spending by European and American companies may trend towards easing, expecting a recovery in the enterprise IT hardware sector by 2025

According to the Zhitong Finance APP, CITIC Securities has released a research report stating an optimistic outlook for the recovery opportunities in the global enterprise IT hardware sector in 2025. It is expected that the main factors suppressing global enterprise IT hardware spending in 2024 will significantly improve by 2025. Positive macro expectations, the elimination of policy uncertainties after the U.S. elections, and the opening of the Federal Reserve's interest rate cut channel will contribute to a generally relaxed IT spending environment for enterprises in Europe and the U.S. Additionally, the end of Windows 10 EOL, the introduction of new generation server CPU platforms, and the completion of inventory destocking for enterprise network equipment will also provide support in terms of sales and structure. Coupled with further downward adjustments in market expectations after the third quarter reports, there are favorable investment opportunities in the U.S. enterprise IT hardware sector in 2025.

CITIC Securities' main viewpoints are as follows:

Enterprise IT Hardware: Optimistic about recovery opportunities in the sector over the next 12 months.

Since 2024, apart from AI-related sectors, the global market has continued to exhibit the weak state of 2023, with the recovery cycle being repeatedly delayed. The bank summarizes the possible reasons as follows:

1. The ongoing high inflation environment in Europe and the U.S., along with high interest rates, has led to continued tightness and caution in enterprise IT spending;

2. Within limited IT budgets, enterprises are giving higher investment priority to AI, further squeezing traditional IT spending;

3. Post-pandemic inventory adjustments in certain sub-sectors such as network equipment on the enterprise client side have resulted in weak short-term sales for upstream hardware manufacturers.

Currently, the bank believes that positive factors in the sector are accumulating, including improvements in macro expectations, an upcoming wave of enterprise upgrades, and sustained driving by AI. Over the next 12 months, the bank holds a positive view on the U.S. enterprise IT hardware sector.

Macro Expectations: Overall improvement after the U.S. elections.

Historical experience shows that enterprise IT spending in Europe and the U.S. is mainly influenced by three core macro factors: macroeconomic expectations, policy uncertainties, and enterprise funding costs.

1. Since September, accompanied by the gradual decline of inflation, and the beginning of the Federal Reserve's interest rate cut cycle, market expectations for the U.S. economy have begun to improve significantly, including improvements in the U.S. economic surprise index and the U.S. small business optimism index;

2. On the policy front, the conclusion of the U.S. elections has eliminated the greatest uncertainty in the short to medium-term policy landscape, and IT spending that enterprises had previously hesitated on and chosen to observe is likely to begin to materialize after the elections;

3. Regarding funding costs, although the last mile of U.S. inflation is declining slowly, it remains within a controllable range. The continuous decline in policy rates is still a high-probability scenario, and the improvement in economic expectations will also help narrow enterprise credit spreads, pushing down financing costs for small and medium-sized enterprises.

PC: Expected mid-to-high single-digit growth in 2025, with commercial PCs as the main driver.

The bank expects global PC market sales to remain flat or grow slightly in 2024, but anticipates mid-to-high single-digit growth in 2025, with commercial PCs performing better structurally.

1) Windows 10 EOL, according to Statcounter data, currently only 35.6% of PCs worldwide running Windows OS are using Windows 11, and Dell estimates that more than one-third of PCs globally do not meet the hardware requirements for Windows 11 In the next year, the end of life (EOL) for Windows 10 is expected to drive a global replacement wave for commercial PCs.

2) PC Upgrades, the last peak in global PC sales was mainly concentrated during the pandemic period of online work (2020/2021), with a typical upgrade cycle for general PCs being around 4 to 5 years.

3) AI PCs, constrained by high prices (ASP > $1200) and a lack of AI applications, AI PCs are not expected to explode in 2024 as anticipated. With improvements in the industrial ecosystem, the firm expects the global penetration rate of AI PCs to reach around 15% by 2025 (excluding Apple).

General Servers: Expected to see single-digit growth in 2025.

Driven by CSPs in Europe and the United States, the global general server market began to recover starting in Q2 2024. The firm believes that the current upward trend is likely to continue into 2025, with global shipments expected to grow in the single digits and ASP increasing by around 10%.

1) CSP Capital Expenditure Cycle & Cloud Computing Demand, North American cloud vendors exhibit a clear "big-small year" cycle in capital expenditures, with contraction cycles lasting about 4 to 6 months and expansion cycles around 2 years. Since Q3/Q4 2023, cloud computing demand from enterprises in Europe and the United States has begun to rebound, with the majority of enterprise cloud computing demand being supported by general servers, and a small portion by AI servers.

2) Introduction of New Generation Server CPU Platforms, the lifecycle of general servers has been continuously extended over the past two years. Starting in 2024, Intel and AMD's new generation server CPU products will begin to be introduced. The new system platforms overall will have higher computing efficiency and lower TCO (total cost of ownership). Coupled with AI's demands for improved computing power and reduced power consumption, the firm expects that in the next 12 months, cloud vendors will further accelerate the pace of upgrading general servers.

AI Servers: Expected to see nearly 70% growth in industry scale by 2025.

The firm estimates that capital expenditures by the four major CSPs in North America in the AI server field will exceed $120 billion in 2025, a year-on-year increase of 51%. With improvements in the supply chain, government and enterprise clients will also accelerate the deployment of AI computing power, with the global AI server scale expected to exceed $270 billion in 2025, a year-on-year increase of 68%.

In the short term, the migration of NVIDIA's GPU products from the H series to the B series, as well as the early supply chain ramp-up of B series products, may cause some performance disruptions for OEM manufacturers. However, the latest Q3 reports show that the backlog and pipeline data for manufacturers like Dell and Lenovo are relatively optimistic.

Enterprise Storage & Network Equipment: Slow Recovery.

1) Enterprise Storage, since 2024, there has been a clear divergence in demand trends between general servers and enterprise storage. General servers have shown significant recovery, while enterprise storage (excluding some high-end storage) has overall shown weak recovery. The firm believes this is mainly due to the overall tightness of enterprise IT budgets. Looking ahead to 2025, the firm maintains a cautious and objective attitude, expecting the recovery strength of enterprise storage to follow that of commercial PCs and general servers 2) Network Equipment: The corporate network equipment market has performed relatively flat over the past two years due to the natural decline in demand following the pandemic and the destocking of downstream customer inventories. However, based on the latest financial reports from companies like Cisco, this firm sees that the destocking of downstream corporate customer inventories has basically been completed, and Cisco's new orders have shown positive growth for three consecutive quarters. Coupled with the rebound in downstream corporate IT spending, this firm is optimistic about the performance of the corporate network equipment market in 2025.

Investment Recommendations:

The main factors suppressing global corporate IT hardware spending are expected to improve significantly by 2025. Positive macro expectations, the elimination of policy uncertainties following the U.S. elections, and the initiation of the Federal Reserve's interest rate cut channel will contribute to a generally looser IT spending environment for European and American companies. Additionally, the end of Windows 10 EOL, the introduction of a new generation of server CPU platforms, and the completion of destocking in corporate network equipment will also provide support in terms of sales and structure. Combined with further downward adjustments in market expectations after the third-quarter reports, it is recommended to pay attention to: commercial PCs, AI servers, general servers, network equipment, and enterprise storage sectors.

Risk Factors: Risks of re-inflation in the U.S. economy; global geopolitical conflicts and trade tariff risks; risks of global economic downturn exceeding expectations; ongoing tightening of regulations in the technology industry; risks of AI technology advancements falling short of expectations; risks of loss of key technologies and talent in enterprises, etc