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Will the UK’s Brexit and the Weakening Pound Pose Concerns for IBM?

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British pound versus US dollar

Earlier in this series, we discussed IBM’s (IBM) recently announced fiscal 2Q16 results. In fiscal 2Q16, currency fluctuations had a minimal impact on IBM’s growth, as the chart below shows. However, the announcement of the United Kingdom’s referendum results in favor of exiting the EU, or Brexit, caused the stock to fall by ~6% in late June 2016.

IBM generates approximately one-third of its revenue from Europe (EFA). Within Europe, the UK (EWU) is an important market for IBM. In 2016, IBM acquired Optevia to strengthen its presence as an SaaS (software-as-a-service) consultant in the UK’s public sector market.

Amazon (AMZN), the undisputed leader in the cloud space, is also heavily invested in the UK. It has invested $6.3 billion in the UK in the last six years.

The UK’s Brexit is likely to lead to a trade slowdown between the UK (EWU) and the Eurozone (FEZ), which will impact their respective economies. This impact is likely to weaken the euro and the pound.

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Tech players are hiking prices

The British pound has hit a 31-year low against the US dollar in July 2016. Earlier, IBM was grappling with a strong dollar, and now with the pound falling against the dollar, the impact on IBM’s revenues from the UK and Europe will likely be significant.

Notably, the pound’s volatility against the US dollar forced HP (HPQ) to consider an increase in its prices in the UK. According to Arstechnica, Lenovo (LNVGY) and Cisco (CSCO) could be the next in line to increase prices.

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