Worth Thinking About How Falling Dollar Will Affect Tech Companies - JP Morgan

Seems that JPMorgan piggy backed on my idea (see write-up here) that investors should start thinking about the impact of the falling dollar on Tech companies in 4Q and 2009. They think that Priceline (PCLN) will benefit the most given that international gross bookings account for 60% of total company bookings. eBay (EBAY) will have a modest impact on revenue and profitability; Amazon (AMZN) will have a muted impact in 4Q but benefit in 2009; Google (GOOG) will benefit the least because of its current currency hedging program.

The likelihood that the dollar goes into a tailspin next year is high and that is likely to give a boost to Tech estimates but this needs to be balanced with the continued economic pressures outside the U.S.

From JPMorgan Analyst Imran Khan:

In a quarter filled with headwinds to Internet sector performance, a potential positive impact may come in the form of foreign exchange rates. During 4Q, the Euro/Dollar exchange rate fell to a low of $1.23 but has rebounded nicely with December 18th posting an exchange rate of $1.43. We think that the dollar will likely remain weak as the Fed pursues options to spur the flagging economy. Thus, we may see upside to 4Q and F’09 revenue growth estimates. Below we take a look at the FX impact on internet stocks with significant international exposure.

We think the biggest beneficiary will be Priceline. Our Priceline 4Q estimates and management guidance were based on an exchange rate of $1.29. As the average exchange rate for the quarter was $1.30, we think dollar weakness will only minimally benefit top-line growth (int’l gross bookings are ~60% of total gross bookings) and lower the other income line which accounts for hedging profits. Our F’09 estimates are based on an average exchange rate of $1.28; thus, if the FX rate increases to $1.40, this would increase our F'09 int’l gross booking growth estimate from (7%) to 2% and raise our pro forma EPS estimate to ~$5.97 from $5.64.

Modest revenue impact; could help profitability at eBay. Our 4Q’08 estimates were predicated on a $1.30/€ exchange rate. With much of the holiday shopping season already behind us, we do not expect to see more than a $10M boost to our 4Q revenue estimate if the past week’s dollar weakness persists through the remainder of the quarter. We expect international will represent 53% of F’08 revenue, with ~43% from the UK or Euro area. For F’09, we think if the full-year € and £ exchange rates stay at current levels ($1.40/€ and $1.50/£), it would boost our Y/Y revenue growth estimate by ~2%. Currently we are modeling 10% global revenue growth in F’09. Due to a more limited local currency cost base, we think profitability could see a slightly larger impact.

Muted 4Q impact at Amazon; positive for F’09. Our 4Q’08 estimates were predicated on a $1.30/€ exchange rate. We believe the impact of the recent FX move is likely to be immaterial for Amazon revenue in 4Q’08, significantly less than 1% of our $6.65B estimate. Amazon’s 4Q guidance anticipates a >500 bp headwind to overall revenue growth from FX; based on current rates we expect the headwind to be ~550 bps. We expect 47% of Amazon F’08 revenue to come from outside North America, with ~41% from either the UK or Euro area. For F’09, we think that if the full-year € and £ exchange rates stay at current levels ($1.40/€ and $1.50/£), it would boost our Y/Y overall growth rate estimate by ~2%. Currently we are modeling 18% global revenue growth in F’09.

Google should not see much of an EPS impact. Roughly 30% of Google revenue is Euro-denominated. Our 4Q’08 and F’09 estimates were based on an exchange rate of $1.30. Therefore, the average 4Q exchange rate is tracking in line with our estimates. In F’09, we do not see much of a currency benefit even though the exchange rate is tracking 8% ahead of our estimates as Google has engaged in extensive hedging activities to offset the impact of the strengthening dollar. Google established 18-month hedges to earnings in Canadian dollar, Euro, and British pound currencies. At maturity, any unrealized gain from the options is recognized as domestic revenue. Thus, we think any foreign exchange benefit to int’l revenue will be partially offset by not recognizing unrealized gains from options as domestic revenue.

Comments

[jepittman:]

There are a lot of other companies that could be included in this exercise. What about Cisco? IBM? QCOM? AAPL? INTC? All of these companies have sales overseas and compete globally. A lower dollar will contribute to their profitability.

Why stop with tech? What about other industries? In pharma, JNJ, BMY, SGP, PFE, all with large overseas sales.

What about industrials? GE, UTX, CAT, all do loads of overseas busines, all aided by a lower dollar.

A lower dollar is part of the answer to the recession problem. As we move through 2009 the declining dollar will aid cushion the results of companies doing business overseas.

2008 Dec 22 11:28 AM

[Patricia013:]

Ebay will nosedive next year.

2008 Dec 22 12:22 PM

[myWealth.com:]

Good article. Glad to see someone agrees with me on the fall of the dollar next year. Awesome!

2008 Dec 22 04:04 PM

[stopwhining:]

Only way this charade holds up is with China's continued to support to act as creditor. I wonder how long they can continue to buy Tbills in light of slowing growth and the prospect of a falling USD. That said, where else can they put their money? In the 1930's, we financed the world in an effort to lend consumers the money required to buy excess production, now, China is lending us money to buy their exports. Now, as then, the situation has become co-dependent. That said, there are fundamental differences that will impact how this plays out.

At what point does the international community balk at the prospect of lending us additional capital? That is tough to say. So long as we can avoid blowing money on unnecessary wars (and diffuse larger real conflicts), we may yet survive with our hide intact.

2008 Dec 22 07:55 PM

[Barak:]

Please view my post "Will We Reach 4 RMB Per U.S. Dollar?" seekingalpha.com/artic...

Barak


On Dec 22 04:04 PM Sean Hyman wrote:

> Good article. Glad to see someone agrees with me on the fall of the
> dollar next year. Awesome!

2008 Dec 23 09:21 AM