Thursday, December 18, 2008

Weakening Dollar. Should Tech Estimates Be Adjusted Upward?

Now that the dollar has fallen for the past two weeks against the Euro and the British Pound, could this mean that Tech companies that derive a significant percentage of revenues from outside the U.S., are likely to post stronger than expected results for the current quarter!

That depends on how much of their revenues is derived in December compared to the other two months of the quarter. For companies like eBay, Amazon, and Google (all three generate close to 50% or more of revenues outside the U.S.), the percentage of revenues derived in December is significant both domestically and internationally. The same is not true for the software and semiconductor companies, whose revenues are more evenly paced throughout the quarter. Those companies derive anywhere from 50%-75% of their revenues outside the U.S.

Almost every Tech company reduced guidance for the quarter partly due to the stronger dollar (but largely due to the economy). As well, analysts reduced their estimates for the quarter due in part to the stronger dollar.

Most journalist focus on the absolute revenue and profit numbers while the more astute analysts will analyze results ex the FX effect. But the overall headline number is what will grab attention and what will drive the stocks up or down initially.

I doubt analysts will adjust their numbers for the weakening dollar for three weeks of the quarter. If the Nets get a bump in revenues and profits due to the weak dollar, then the likelihood of a beat vs. Street seems high. Not so for the software and semiconductor companies.

So what about 2009 guidance and estimates? Not sure CFOs will factor in the weakening of the dollar into their guidance for the year. But they should be thinking about it.

The Wall Street Journal stated that the Fed has "undercut any advantage to holding the dollar versus another currency" and that the quantitative easing suggested by the Fed " will flush the system with more dollars, essentially decreasing the currency's underlying value". The two together spells significant weakness for the dollar going forward, according to Tom Fitzpatrick, the head of currency strategy at Citigroup.

While I am not sure how to play this one yet for equities, I will definetly watch for how the Street and the companies adjust numbers for 2009 to account for the weak dollar. That is off course balancing that with what could be continued economic weakness in Europe and other areas outside the U.S.

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