The strong dollar is making it more expensive for companies to operate. That's why Microsoft is carefully steering as it tries to minimize the impact of the currency on its business.
In a PowerPoint presentation Thursday, Microsoft executives revealed that the company reduced its earnings and income projections for the fourth quarter due to the unfavorable exchange rate. The changes in the estimates sent the company's stock price higher. Although the earnings and income projections were initially unveiled in April, the revision differed.
Microsoft's stock price fell 2.5% in premarket trading. However, even after a strong rally in tech stocks, the company's shares were still off 1.2%. Despite the negative impact of the revision, the broader market was still higher. The tech-heavy Nasdaq and the broader S&P 500 were up more than 2%.
Strong dollar impacts tech companies' earnings
Several tech companies have been talking about the strong dollar's impact on their operations during the earnings season. For instance, Salesforce Inc., a Dow component, warned that it might not be able to maintain its current revenue growth rate due to the unfavorable exchange rate. Wall Street was also cheered by this outlook because it suggests that companies might not be able to sustain their capital expenditure (CapEx).
Many of the warnings that came out during the earnings season were similar to those issued by companies that had already completed their fiscal quarters. According to Tyler Radke, an analyst at Citi Research, the dollar's strength was likely why Microsoft updated its estimates in April. He also noted that the company's currency assumptions were established during the free fall in the currencies against the US dollar.
Despite the negative impact of the currency on the company's operations, Radke noted that the updated estimates were still within the company's normal range. He also pointed out that the company still recognizes the importance of the currency.
Declining USD index
The dollar index, which measures the exchange rate against a basket of other currencies, fell 0.6% from April 26 to May 31. The dollar rose against the Japanese yen, the euro, and the British pound during the same period. It also increased its strength against the other currencies. The DXY, which measures the dollar against other major currencies, also rose 4.7%.
One of the most positive signals analysts took from the updated estimates was the absence of references to the economic weakness. Timothy Horan, an analyst at Oppenheimer, noted that the lack of references to the weakness was a surprise. He also noted that many companies have been warning about the potential impact of the strong dollar on their operations.
Horan stated that Microsoft is still expected to benefit from the digital transformation trend despite the macro concerns. He added that the company's powerful platform can still generate strong revenue growth.
Demands remain strong
According to Louis Navellier, founder of Navellier & Associates, the positive signs during the earnings season were mainly due to the strong demand for Microsoft.
Navellier noted that the strong dollar is also expected to harm the operations of companies that derive their revenue from offshore. Additionally, he warned that the upcoming rate increases by the Federal Reserve will likely lead to a stronger dollar.
Although the strong demands remain available, Microsoft reduced its earnings forecast for the current fiscal year to $2.24 to $2.32 a share from its previous estimate of $2.28 to $2.35. The company noted that the unfavorable impact of the currency would shave 3 cents a share off its earnings.