SEOUL, SOUTH KOREA – FEBRUARY 22: A South Korean banker carries US dollar papers to Korea … [+]
Since last November, it seems that unless they shorten large tech stocks, investors can’t win.
The latest destroyer in stock market value is the strong dollar. This is good news for Americans traveling to Europe this summer but bad news for investors who own shares of companies that make a large portion of their overseas sales.
On July 18, IBM
IBM
Why the Dollar is Strong
Compared to other world currencies, the dollar is stronger than in the past 20 years. According to the New York Times in 2022 to July 15, the dollar gained more than 10% compared to a basket of currencies with U.S. trading partners such as Japan and the Eurozone. That’s a big change “for an index that typically changes small fractions every day.” mentioned by the Times.
The dollar is now considered the strongest currency in the world for three reasons, according to the Times:
- Rising rates of Fed Funds. 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 U.S. treasury bonds – are attracting more capital from around the world.
- The US is more energy independent than Europe. The US is more energy independent than European countries that import more oil and gas from abroad
How A Strong Dollar Hurts Large US Exporters
American companies with large international operations pay a price when they return their overseas sales in dollars.
The strong dollar will cut 2022 earnings growth for the S&P 500. Ben Laidler, global markets strategist at eToro, estimates that the strong dollar will cut the S&P 500 earnings growth by five percent- or more. approximately $ 100 billion. That represents a large portion of Factset’s estimated 10% 2022 revenue growth forecast, the Times said.
Big tech companies have already paid the price for strong dollars — including Microsoft and ServiceNow. Apple – which makes up 60% of its overseas sales, is likely to report big revenue and revenue hits due to the strong dollar, according to the Times.
How much has the strong dollar hurt the big technology companies. Consider Microsoft-almost half of its revenues come from outside the US. In the quarter ending June, the strong dollar reduced its sales by $ 302 million. For the next quarter, Microsoft’s sales and revenue could be $ 460 million and $ 250 million lower, respectively, due to the strong dollar, according to Business Insider.
IBM’s Solid Q2 Was Hit By A Strong Dollar
Since the pandemic began, IBM has enjoyed the leadership of a new CEO, Arvind Krishna. Since his appointment as CEO on April 6, 2020, IBM’s stock has risen an average of 10%.
That’s an improvement over the previous regime – in the decade between 2010 and 2020 IBM’s revenue dropped to an average 3% annual rate while its stock dropped to a 1.5% average annual rate.
To satisfy a company with 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 in the first thing but fell short in the second – and on July 19, investors expressed their displeasure by falling 6.6% from the value of its shares.
The good news is that IBM reported 9% sales growth and an 80% surge in earnings per share that both exceeded investor expectations, according to the Wall Street Journal.
More specifically, IBM’s $ 15.5 billion revenue in the second quarter was $ 300 million more than analysts forecast while its fixed EPS, at $ 2.31 a share, was three cents more than agreed, according to Barron’s.
The bad news is a disappointing forecast that is largely associated with a strong dollar.
In April, IBM predicted free cash flow for 2022 in the range of $ 10 billion and $ 10.5 billion. IBM CFO Jim Kavanaugh reduced that to $ 10 billion because of the strong dollar and the suspension of its “highly profitable” business in Russia.
IBM reiterated its revenue forecast “for continued cash revenue growth at the high end of their mid-single-digit model for the year.” Sadly, IBM’s growth would be 6% higher – or $ 900 million more in revenue – if the dollar didn’t strengthen sharply in the quarter, according to CNBC.
Netflix Q2 Expectations And Strong Dollar Risk
Netflix reported a disastrous first quarter and lowered its guidance for the end of June. In April, I wrote that Netflix was likely to report a disappointing loss of subscribers.
That’s what happened on April 19 when it reported a 200,000 decrease in the number of its subscribers-which included the loss of 700,000 subscribers when it came out in Russia. Since then, Netflix’s share has fallen by 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, its share will surely fall after hours.
However, what if Michael Pachter of Wedbush securities is right? According to DifferentPachter expects Netflix to lose only 1.5 million and release a forecast of one million to new subscribers for the current quarter as its popular Stranger Things is released over time rather than all at once.
Meanwhile, investors are enabling their spreadsheets to estimate how many additional subscribers will be added due to Netflix’s ad-based level of service.
Netflix can charge $ 10/month in the U.S. for the ad -based plan, which Morgan Stanley estimates could generate $ 7 per month per subscriber in advertising revenue, Variety said.
Cowen analyst John Blackledge estimates that Netflix’s ad -based plan could add 4.3 million incremental subscribers in the U.S./Canada by 2023. Blackledge estimates that Netflix subscribers in 2023 will increase by 10.2 million in 2023 to end the year at 239.7 million, Variety reported.
Then there’s the question of how much Netflix’s revenues will be hurt by the strong dollar. After all, it generated 58% of its revenues in the first quarter of 2022 outside the US
Since Netflix isn’t withholding its money exposure, according to its first quarter report filed with the SEC, I wouldn’t be surprised to see it follow in the footsteps of other large tech companies and lower its sales forecast in 2022 for in stronger dollars.
Investors probably don’t care about it and will focus more on its prospects for faster than expected subscriber growth.
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