Since last November, it seems that unless they shorted big tech stocks, investors just can’t win.
The latest stock market value destroyer is the strong dollar. It’s great news for Americans who are traveling in Europe this summer but bad news for investors who own shares of companies that generate much of their sales overseas.
On July 18, IBM
Why The Dollar Is Strong
Compared to other world currencies, the dollar is stronger than it has been in 20 years. According to the New York Times in 2022 through July 15, the dollar gained over 10% compared to a basket of currencies with US trading partners such as Japan and the Eurozone. That is a huge change “for an index that typically shifts by tiny fractions each day.” noted the Times.
The dollar is now perceived as the world’s strongest currency for three reasons, according to the Times:
- Soaring Fed Funds rate. The Fed is tightening more aggressively than other central banks around the world
- US government debt is a global safe haven. Higher interest rates — considering the relative safety of US treasury bonds — are attracting more capital from around the world
- US is more energy independent than Europe. The US is more energy independent than European countries that import more of their oil and gas from abroad
How A Strong Dollar Hurts Big US Exporters
American companies with large international operations pay the price when they convert their foreign sales back into dollars.
The strong dollar will cut into 2022 earnings growth for the S&P 500. Ben Laidler, global markets strategist at eToro, estimated that the strong dollar will reduce S&P 500 earnings growth by five percent — or about $100 billion. That represents a large portion of Factset’s estimated 10% 2022 earnings growth forecast, noted the Times.
Big tech companies have already paid a price for the strong dollar— including Microsoft and ServiceNow. Apple — which generates 60% of its sales overseas, is likely to report a significant revenue and profit hit due to the strong dollar, according to the Times.
How much does the strong dollar hurt such big tech companies. Consider Microsoft — about half of its profits come from outside the US. In the June-ending quarter, the strong dollar reduced its sales by $302 million. For the next quarter, Microsoft’s sales and profits could be $460 million and $250 million lower, respectively, due to the strong dollar, according to Business Insider,
IBM’s Solid Q2 Hurt By Strong Dollar
Since the pandemic began, IBM has enjoyed the leadership of a new CEO, Arvind Krishna. Since his appointment as CEO April 6, 2020, IBM stock has risen a modest 10%.
That’s an improvement over the previous regime — in the decade between 2010 and 2020 IBM’s revenue fell at an average 3% annual rate while its stock dropped at a 1.5% average annual rate.
In order for a company to enjoy a pop after it reports quarterly earnings, it must exceed expectations and raise its forecast for the future relative to Wall Street expectations.
IBM did well on the first thing but fell short on the second one — and on July 19, investors expressed their displeasure by knocking 6.6% off the value of its shares.
The good news was that IBM reported 9% sales growth and an 80% surge in earnings per share both of which exceeded investor expectations, according to the Wall Street Journal,
More specifically, IBM’s $15.5 billion in second quarter revenue was $300 million more than the analysts’ forecast while its adjusted EPS, at $2.31 a share, were three cents more than the consensus, according to Barron’s.
The bad news was a disappointing forecast largely attributable to a strong dollar.
In April, IBM forecast free cash flow for 2022 in the range of $10 billion and $10.5 billion. IBM CFO Jim Kavanaugh reduced that to $10 billion due to the strong dollar and the suspension of its “highly profitable” business in Russia.
IBM repeated its revenue forecast “for constant-currency revenue growth at the high end of their mid-single-digit model for the year.” Sadly, IBM growth would have been 6% higher — or $900 million more in revenue — if the dollar had not strengthened so much during the quarter, according to CNBC,
Netflix’s Q2 Expectations And Strong Dollar Risk
Netflix reported a disastrous first quarter and lowered its guidance for the June-ending quarter. Back in April, I wrote that Netflix was likely to report a disappointing loss of subscribers.
That is what happened on April 19 when it reported a 200,000 reduction in its subscriber count — which included the loss of 700,000 subscribers when it exited Russia. Since then, Netflix shares have fallen 43%.
Netflix set expectations low for the second quarter report. Will it report a loss of two million subscribers in the second quarter? If Netflix loses more than two million, it shares will surely fall after hours.
However, what if Michael Pachter of Wedbush securities is right? According to VarietyPachter expects Netflix to lose only 1.5 million and to issue a forecast of a million in new subscribers for the current quarter because its popular Stranger Things was released over time rather than all at once.
Meanwhile, investors are powering up their spreadsheets to estimate how many additional subscribers will be added because of Netflix’s ad-based tier of service.
Netflix could charge $10/month in the US for the ad-based plan, which Morgan Stanley estimates could generate $7 per month per subscriber in advertising revenue, noted Variety.
Cowen analyst John Blackledge estimates that Netflix’s ad-based plan could add 4.3 million incremental US/Canada subscribers in 2023. Blackledge forecasts that Netflix’s 2023 subscribers will increase by 10.2 million in 2023 to end the year at 239.7 million, reported Variety.
Then there is the question of how much Netflix’s revenues will be hurt by the strong dollar. After all, it generated 58% of its first quarter 2022 revenues outside of the US
Since Netflix does not hedge its currency exposure, according to its first quarter report filed with the SEC, I would not be surprised to see it follow on the footsteps of other big tech companies and lower its 2022 sales forecast to account for the stronger dollar.
Perhaps investors will not care about this and will focus more on its prospects for faster than expected subscriber growth.
Credit: www.forbes.com /