Microsoft joins the chorus of tech companies warning of the impact of a strong dollar

microsoft corp lowered its guidance on a headwind that has been a dominant talking point for tech companies reporting earnings lately: the strong dollar is making business more expensive.

Microsoft MSFT,
+0.11%
Executives revealed Thursday in a Powerpoint presentation that they cut the company’s earnings and sales estimates for the fiscal quarter ended June 30 on Thursday, due to an “unfavorable exchange rate movement in the fourth quarter.”

For more: Analysts say Microsoft results show ‘absolute resolute confidence’

Microsoft MSFT,
+0.11%
Shares are down about 2.5% in premarket trading and down 1.2% at last check, despite a broad and strong rally on Thursday in tech stocks, particularly software. The iShares Expanded Tech Software Sector ETF IGV,
+4.58%
rose more than 4% and the tech-heavy Nasdaq Composite Index COMP,
+2.36%
rose more than 2% while the Dow Jones Industrial Average DJIA,
+0.76%
was less than 1% ahead.

Tech companies reporting later this earnings season have been more vocal about the impact of the strong dollar. Most recently Salesforce Inc. CRM,
+7.63%,
a Dow component like Microsoft, served up a conservative outlook on headwinds in currency rates, and Wall Street applauded because it was the only major headwind given pessimism about whether companies will sustain capital spending amid economic uncertainty.

The latest warnings appear to have come from companies whose fiscal quarter ended at the end of April, giving them more insight into changing currency conditions than those that ended their quarters at the end of March. Tyler Radke, analyst at Citi Research, noted, “While exchange rates do not appear to have changed significantly since the April 26 report date, we believe Microsoft likely posted currency assumptions in mid-April when major currencies were free to decline versus.” the USD.”

“Ultimately, we don’t see the updated guidance as an indication of a change in fundamentals, but recognize that currency is still important,” wrote Radke, who has a $364 price target on the stock.

From April 26 to May 31, the US dollar index DXY,
-0.72%
is down 0.6%, while the dollar is up 1.2% against the Japanese yen USDJPY,
-0.27%,
0.6% against the euro USDEUR,
-0.88%
and 0.1% against the British pound USDGBP,
-0.74%.
However, over the course of April, the dollar was up 6.7% against the yen, 5.5% against the euro and 4.9% against the pound, and the DXY was up 4.7%.

A good sign that analysts took from the announcement was the lack of blame on macroeconomic conditions. Oppenheimer analyst Timothy Horan, who has a price target of $340, said: “Surprisingly, economic weakness was not mentioned as a chorus of companies sounded warnings as the global recession increasingly becomes the consensus view.”

“As we’ve written, macro will continue to be a concern, but Microsoft appears to have a relative advantage with a powerful platform that directly benefits from the digital transformation megatrend,” Horan said.

See Also: Can US Stocks Extend the Rebound? Inflation worries linger ahead of key jobs data

Louis Navellier of Navellier & Associates said the silver lining for Microsoft and Salesforce is that “both companies said demand for their products and services remains strong.”

“As the Fed plans to raise short-term interest rates aggressively in the near term, the strong dollar is likely to continue to hurt companies with significant offshore revenue,” Navellier said. “It’s also another reason to like energy companies, as crude oil is traditionally valued in US dollars around the world to avoid exchange rate issues.”

“Microsoft’s change in mid-term guidance also shows how far analysts are behind Wall Street in providing accurate estimates,” Navellier said. “Focus on companies with strong fundamentals that don’t rely on an overall strong economy.”

Microsoft cut its earnings guidance to $2.24-$2.32 from a previous $2.28-$2.35 per share, while analysts polled by FactSet have a consensus of $2.33 per share. Due to rounding, Microsoft said the “additional currency impact” hurt earnings by 3 cents a share.

The company also lowered its revenue guidance to $51.94-52.74 billion from a previous $52.40-$53.2 billion, with the new range below the FactSet consensus of $52.90 billion . Microsoft said its “additional FX impact” will be calculated through May 31, but “actual results for the full quarter may vary through June 30 depending on exchange rate movement,” according to its original April 26 forecast.

Of the 43 analysts covering Microsoft, 42 have a buy rating and Fundamental Research’s Siddharth Rajeev is the only one with a hold rating. On average, analysts have a price target of $356.13 on the stock.

https://www.marketwatch.com/story/microsoft-joins-chorus-of-tech-companies-warning-about-the-effects-of-a-strong-dollar-11654193503?rss=1&siteid=rss Microsoft joins the chorus of tech companies warning of the impact of a strong dollar

Brian Lowry

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