Microsoft (MSFT -1.84%) just joined a growing list of companies revising their growth estimates down for 2022 thanks to a strong U.S. dollar. Just a few days prior, cloud software pioneer Salesforce (CRM -1.59%) issued a similar warning, even as it reports resilient demand for its services as the world continues to go digital.
With the dollar on an absolute tear as of late, don't be surprised to see more businesses follow suit. Despite the headwind, though, business is going just fine.
Image source: Getty Images.
The greenback is having a year
The U.S. dollar's rise in 2022 has been stunning. As of this writing, the dollar's value has increased 13% against the Japanese yen so far this year, and is up nearly 20% over the last 12-month stretch. The dollar has strengthened nearly 6% against the euro so far in 2022, and over 13% in the last year. Other foreign currencies have performed in similar fashion. As measured by the DXY U.S. Dollar Index (which measures the U.S. dollar's value against a basket of foreign currencies), the greenback is up over 6% in 2022.
If you find yourself traveling internationally this summer, you might be in for a pleasant surprise when you exchange your money for the local unit of exchange.
If you're a U.S. investor, however, a strengthening dollar isn't the best of news. Microsoft just revised its fiscal 2022 fourth-quarter expected revenue down by $460 million. The update now implies "only" about 13% year-over-year sales growth for Microsoft.
Snapchat parent Snap (SNAP 6.70%) also recently downgraded its guidance, simply saying it was not going to meet its previously stated revenue growth target of 20% to 25% in the second quarter due to a confluence of macroeconomic issues, including inflation, rising interest rates, Russia's war on Ukraine, and supply chain shortages. Perhaps that was a more nuanced way of saying "we forgot to factor currency exchange issues." Or maybe it's simply a TikTok competition problem. We shall see.
Salesforce made a similar downward revision, too. It had already called out foreign currency exchange rates as having a $300 million impact on expected revenue this year, but during the first-quarter earnings update, management increased that impact to about $600 million for the full-year period. The company thinks sales will increase about 20% year over year.
On the earnings call, Salesforce CEO Marc Benioff mentioned he was recently in Japan and called out the massive run the dollar has had against the yen. Again, that's great if you're a tourist, but not so great if you are a corporation doing business overseas and then need to convert your income back into a stronger dollar. Benioff quipped, "the dollar might have even had a stronger quarter than we did."
Not quite. Salesforce revenue increased 24% year over year in Q1, but you get Benioff's drift.
How is a strong dollar a "bad" thing?
A strengthening dollar is being caused by several factors. The world is grappling with supply chain shortages (springing from pandemic lockdowns) and a resulting slowdown in economic recovery. Global inflation has been the result of these supply shortages, and Russia's war on Ukraine is adding fuel to the fire. In an effort to try to tame rising prices, the U.S. Federal Reserve is raising interest rates and tightening monetary policy.
With interest rates on U.S.-based debt going up and the global supply of dollars perhaps getting slightly more scarce thanks to the Fed, investors are flocking to the dollar and driving its value higher. Chalk it up to the U.S. economy's relative strength and resilience.
For companies like Microsoft and Salesforce, business is still going swimmingly. However, when a software sale (or any type of sale, for that matter) is made outside of the U.S. in a foreign currency, that money needs to be converted back into dollars for the sake of financial reporting. If the U.S. dollar gains in value against that given foreign currency, the value of the reported sale is less at the time of reporting. That's the headwind Microsoft, Salesforce, and others are facing right now.
That's not to say the opposite couldn't happen at some point. If the Fed stops raising interest rates (maybe late this year or in 2023), or if global economic conditions improve, the U.S. dollar could give back some of its value. That would turn the current headwind facing these software giants into a positive tailwind. Such was the situation back in 2020 during the early months of the pandemic when the Fed slashed interest rates to effectively 0%, and corporations doing international business reported a positive foreign currency exchange effect.
At any rate, while revenue guidance being cut isn't good news for Microsoft and Salesforce investors, this could wind up being a short-term and temporary issue. The upshot is both companies haven't witnessed any deterioration in actual demand for their services. On the contrary, business is still very healthy and the longer-term growth outlook for the cloud computing industry remains intact.
