Microsoft (MSFT 2.52%) shares are under pressure on Thursday after the software giant lowered expectations for the current quarter. It is set to report these results in July.
Microsoft has a fortress balance sheet, and this is likely just a small blip in what continues to be an impressive growth story. But the reason behind the warning is likely to ripple through a wide number of companies during the second quarter. Microsoft is sounding the alarm that a strong U.S. dollar is going to impact results.
Image source: Microsoft.
Lost in translation
In a market update published Thursday morning, Microsoft lowered its fiscal fourth-quarter earnings per share guidance to $2.24 to $2.32 per share, from $2.28 to $2.35 per share, and lowered its revenue guidance to $51.94 billion from $52.74 billion from $52.4 billion to $53.2 billion. Analysts had been expecting numbers just above the current range, with the consensus expectations prior to the announcement for $2.33 per share in earnings on $52.87 billion in sales.
Microsoft blamed the expected shortfall on the rates it is getting as it converts revenues earned overseas to U.S. dollars. The war in Ukraine and economic weakness in Europe and Asia have pushed the U.S. dollar to highs not seen this century relative to foreign currencies. The U.S. dollar has historically been seen as a safe haven in volatile times, and rising interest rates only make it a more attractive place for money to flow.
Dow Jones FXCM Dollar Index data by YCharts
A strong dollar is said to help U.S. consumers because it allows Americans to buy foreign-made products at relatively lower prices. But it makes U.S. products more expensive abroad and means U.S. companies receive fewer dollars for products that they export.
Microsoft is still an attractive buy
Long-term focused Microsoft investors need not worry about this update. The revised guidance is less than a 2% drop on the low side, and even at $2.24 per share would represent 3% growth over the company's same three months a year prior.
Microsoft has more than $130 billion in cash and investments on its balance sheet, and generated more than $20 billion in free cash flow in its most recent quarter.
Whatever impact foreign exchange rates, or forex, have on the quarter this remains a mature, growing tech powerhouse priced at a relatively affordable 10 times sales. Any market sell-off based on weakness would be a buying opportunity for a buy-and-hold investor looking out years, instead of quarters.
Investors need to brace for Forex hits everywhere
Microsoft is hardly alone in sounding the alarm on strong-dollar issues. Salesforce CEO Mark Benioff following a blowout quarter told investors on a conference call, "I think the dollar might have even had a stronger quarter than we did, which is kind of amazing."
Currency issues created a revenue headwind of about $109 million in Salesforce's quarter, something Benioff said, "we could not have anticipated."
Foreign exchange rates should be a concern to investors in nearly any business that sells overseas, which makes up a good percentage of the S&P 500. Industrials and manufacturers tend to be hit particularly hard when the dollar is strong because it limits their ability to market large goods abroad.
For some, like automakers, the strong dollar should also create a tailwind in buying parts that come from overseas. And the strong dollar could partially offset soaring commodity prices, making materials like metals more affordable.
But the net impact on U.S. exports, and the dollars companies will receive for those exports, was likely not factored in when current-quarter guidance was issued earlier this year. Investors should expect more earnings warnings based on currency rates in the weeks to come.
Hold tight, and look for opportunities
Although currency fluctuations are hard to predict and there are only limited ways companies can hedge against them, they are a fact of life for multinationals. As Microsoft shows, a dramatic move in the dollar can blow a hole in the best-laid plans for any one three-month period, but are unlikely to derail a long-term growth story.
Investors should brace themselves for more updates like what Microsoft provided, and remember not to panic if estimates take a hit. The best operators will survive this period of uncertainty even if it means a disappointing quarter.
For investors who can look past these near-term headwinds, there are sure to be opportunities created from the uncertainty.
