While the stronger dollar certainly did hurt technology sector earnings, the currency’s impact wasn’t as bad as predicted, and the case for US tech remains strong.
It’s no secret that a large portion of U.S. technology companies’ sales occur overseas, given the strong international business and consumer demand for software and hardware from many of the largest U.S. tech firms.
Based on the most recent earnings data, roughly 60% of the U.S. information technology sector’s revenue comes from abroad, a higher percentage than in any other sector.
Taking this into account, many market watchers had expected that U.S. tech companies’ first-quarter earnings would be especially hurt by the stronger dollar, and the potential dollar impact was likely a big drawback keeping many investors away from the sector.
The looming rise of the US dollar (UUP) has indeed haunted the US earnings season. The currency has been on a tear in the past eight months, rising more than 12% in 2014—and up almost 3% just this month. The rise of the dollar and the pullback in the energy sector (XLE) due to the oil price slump (USO) (BNO) have often been touted to be some of the primary reasons for a tepid earnings season.
FactSet had estimated a fall in S&P 500 earnings of 4.7% in 1Q15, the worst since since 3Q12. The previous graph shows FactSet’s estimates for earnings and revenues growth for S&P 500 companies with more than 50% of their sales outside the United States. Revenues were slotted to fall 10%, while earnings were estimated to decline by ~11.7%.
The US technology sector was expected to be the worst hit on account of the rise of the dollar, as almost 60% of its revenues are estimated to come from abroad. This is more than any other sector in the S&P 500, as can be seen in the above graph.
Tech giants have certainly felt the heat from the rise of the US dollar. Google (GOOG) reported a 12% increase in its 1Q15 revenues, however, revenues increased by 17% in constant currency terms. Plus, Amazon (AMZN) reported a 15% increase in revenues, which translates to 22% in constant currency terms. Xerox (XRX) has already lowered its guidance for full-year earnings and estimated a 6% fall in revenues, citing currency headwinds as one of the primary reasons.
But, has the tech sector really suffered as much as analyst expectations on account of currency headwinds? We think not. We will explore this theme further in the series.