Microsoft joins chorus of tech companies warning about the effects of a strong dollar

For more: Analysts say Microsoft results show ‘absolute resolute confidence’

Microsoft
MSFT,
+0.79%
shares fell about 2.5% in premarket trading and were off 1.2% at last check, despite a broad and sharp rally in tech stocks Thursday, particularly software. The iShares Expanded Tech-Software Sector ETF
IGV,
+4.59%
was up more than 4% and the tech-heavy Nasdaq Composite Index
COMP,
+2.69%
was up more than 2%, while the Dow Jones Industrial Average
DJIA,
+1.33%
was less than 1% ahead.

Tech companies reporting later this earnings season have been more vocal about the effects of the strong dollar. Most recently, Salesforce Inc.
CRM,
+7.00%,
a Dow component like Microsoft, served up a conservative outlook because of FX headwinds, and Wall Street applauded because that was the only big headwind given pessimism on whether businesses will keep up their capex spend amid economic uncertainty.

The recent warnings appear to be from companies with fiscal quarters that ended at the end of April, which gave them more insight into the changing currency conditions than those that wrapped their quarters at the end of March. Citi Research analyst Tyler Radke observed that “while FX rates don’t appear to have had a significant change since the April 26th report date, we understand that Microsoft established currency assumptions likely in the mid-April time frame, when major currencies were in free fall vs. the USD.”

“Ultimately we don’t see the updated guidance as indicative of a change in fundamentals, but acknowledge currency still matters,” Radke, who has a $364 price target on the stock, wrote.

From April 26 to May 31, the U.S. Dollar Index
DXY,
-0.73%
has declined 0.6%, while the dollar has risen 1.2% against the Japanese yen
USDJPY,
-0.01%,
0.6% against the euro
USDEUR,
-0.02%
and 0.1% against the British pound
USDGBP,
+0.03%.
Over the course of April, however, the dollar surged 6.7% against the yen, 5.5% against the euro, and 4.9% against the pound, and the DXY rose 4.7%.

One good sign analysts took from the announcement was the lack of blaming macroeconomic conditions. Oppenheimer analyst Timothy Horan, who has a $340 price target, said “surprisingly, no mention was made of economic weakness, as a chorus of companies have been sounding warnings as global recession becomes increasingly consensus view.”

“As we wrote previously, macro will remain concerning, but Microsoft looks relatively advantaged with a powerful platform directly benefiting from the digital transformation megatrend,” Horan said.

See also: Can U.S. stocks extend the bounce? Inflation worries linger ahead of key jobs data

Navellier & Associates’ Louis Navellier said the silver lining for both Microsoft and Salesforce is “both companies said demand for their products and services remain strong.”

“With the Fed planning to raise short rates aggressively in the near term, the strong dollar is likely to continue to impact companies with significant offshore earnings,” Navellier said. “It’s also another reason to like energy companies as crude oil is traditionally priced globally in U.S. dollars, avoiding exchange rate headaches.”

“The Microsoft midterm guidance change also highlights how far behind Wall Street analysts are staying in front of accurate estimates,” Navellier said. “Focus on companies with strong fundamentals not reliant on an overall strong economy.” 

Microsoft reduced its earnings forecast to a range of $2.24 to $2.32 from a previous $2.28 to $2.35 a share, while analysts polled by FactSet have a consensus of $2.33 a share. Due to rounding, Microsoft said that the “additional FX impact” shaved 3 cents a share off earnings.

The company also lowered its revenue forecast to a range of $51.94 billion to $52.74 billion from a previous $52.40 billion to $53.2 billion, with the new range below the FactSet consensus of $52.90 billion. Microsoft said its “additional FX impact” is calculated through May 31, but “actual results for the full quarter may vary based on FX rate movement through June 30” following its original guidance on April 26.

Of the 43 analysts who cover Microsoft, 42 have buy-grade ratings and Fundamental Research’s Siddharth Rajeev is the only one with a hold rating. On average, analysts have a price target of $356.13 on the stock.