FAANG stocks got crushed last year as a combination of slowing growth and compressing valuations hit even the mightiest tech stocks like Amazon (AMZN -1.65%), Alphabet (GOOGL -1.97%) (GOOG -1.96%), and Apple (AAPL 0.52%).
2023 offers investors the chance at a new beginning, and stocks jumped out of the gate on data showing that inflation is cooling while the economy remains stable.
Looking ahead to earnings season, there's another reason why the stock market, and especially FAANG stocks, could get a boost. The dollar has weakened substantially over the last few months, which makes international revenue more valuable.
Image source: Getty Images.
The FX effect
When big tech stocks reported third-quarter earnings nearly three months ago, a stronger dollar was a major headwind because all of these companies derive a significant percentage of their revenue from outside the U.S.
In Amazon's third-quarter earnings report, the company reported 15% revenue growth, but it rose 19% in constant currency. Alphabet reported 6% revenue growth in its third quarter, or 11% in constant currency, and Netflix's (NFLX 1.74%) revenue rose 6%, or 13% in constant currency.
As you can see from the chart below, the dollar index hit a 10-year high a few months ago, but the dollar cooled rapidly since then as interest rates have fallen and investors expect the Fed to stop hiking interest rates soon.
The chart below shows that the dollar plateaued in late September and October before falling sharply when the CPI report came out in November showing inflation falling faster than expected. It's continued to fall since then and now is the lowest it's been since last May.
Most multinational companies expected currency headwinds to strengthen from the third quarter to the fourth quarter. However, based on the chart above and the year-over-year comparisons, those currency headwinds seem to have actually weakened from the third quarter to the fourth, though they'll still weigh on results.
That's a good indicator that FAANG results will beat guidance since these companies made their forecasts based on the value of the dollar in late October.
Amazon, for example, called for 460 basis points of currency headwinds in its fourth quarter, but currency headwinds will almost certainly be more favorable than that. Similarly, Netflix, which gets most of its revenue from outside the U.S., expected nearly 8 percentage points of currency headwinds.
Not only will these companies benefit from the weaker dollar in the fourth quarter, but their guidance is also likely to get a lift from the falling dollar. In fact, currency exchange could become a tailwind within a couple of quarters and for 2023 as a whole if the dollar continues to weaken.
The weakening dollar is also a tailwind because of its impact on the bottom line. These companies typically have most of their expenses in U.S. dollars since that's where their employees are based, so the revenue impact is likely to be magnified on the bottom line.
FAANG stocks are cheap
After the subsector plunged this year, these stocks are all trading at a discount, and they retain the same competitive advantages they had before last year's crash.
In other words, the weakening dollar, especially if it leads to a beat-and-raise quarter, could be just the catalyst to spark a rebound in these big tech names.
Many of the FAANG stocks are trading at the lowest valuations they've had in years so it shouldn't take much for them to recover. If the dollar continues to weaken, don't be surprised to see FAANG stocks keep marching higher.
