The sputtering Euro is good news for American travelers—but terrible timing for tech companies

IBM executives can take some solace in the fact that investors’ aversion has little to do with the 111-year-old company’s fundamentals. Rather, the newfound strength of the dollar weighed on IBM, causing a lower-than-expected free cash flow outlook that startled Wall Street.

As an unsettling earnings season kicks off for tech companies, the overhang of foreign exchange rates looks increasingly likely to blunt any optimism for a quick reversal of tech stock fortunes. 

For the first time in two decades, one dollar is worth the same amount as one euro. That’s good news if you’re planning a vacation in Europe this summer—you’ll be able to get more baguettes for your buck. But for U.S. tech companies that sell a lot of goods and services overseas, a strong dollar cuts into revenue when foreign sales are converted back into dollars. 

As CNBC’s Tim Mullaney noted last week, tech companies are at particularly high risk from the dollar’s strength this quarter. The industry makes nearly 60% of its revenue outside of the U.S., more than any other sector, according to data from Goldman Sachs. Among the most vulnerable: Apple, Alphabet, Intel, Meta, Tesla, and Qualcomm.

In IBM’s case, nearly half of its second-quarter revenue came from areas outside of the Americas. IBM officials warned in April that the overhang would eat into 3% to 4% of global sales, but they bumped that estimate up Monday to 6%. IBM’s exchange rate hit totaled about $900 million, with predictions for a full-year impact approaching $3.5 billion.

“We execute hedge programs that cover the majority but not all of the currency exposure,” IBM CFO Jim Kavanaugh explained during the company’s earnings call on Monday in which he called the velocity of change in foreign exchange rates “unprecedented.”

IBM CEO Arvind Krishna stressed that commercial demand hasn’t waned despite the global economic slowdown.

“In fact, nearly every client I speak to believes that technology serves as a fundamental source of competitive advantage,” Krishna said. “It serves as both a deflationary force and a force multiplier, and is especially critical as clients face challenges on multiple fronts, from supply chain bottlenecks to demographic shifts.”

That didn’t sway IBM investors though, even as the broader market rallied on Tuesday. While IBM won’t be alone in singing the exchange rate blues, it will be interesting to see to what extent the market has already priced in the pain at other tech companies. 

Microsoft got ahead of the trend in early June, trimming its fiscal fourth quarter sales guidance by about $800 million and earnings outlook by roughly four cents per share. Salesforce also doubled its predicted foreign exchange impact, from $300 million to $600 million, between March and late May. Don’t be surprised if CEO Marc Benioff, whose company draws nearly one-quarter of its revenue from Europe, raises that figure again as the Euro continues to falter.

The currency hit is an unfortunate development for top tech outfits reporting decent sales amid fears of a global and domestic recession. To be sure, foreign exchange fallout likely will eat into a tiny fraction of revenues, especially as companies hedge against the pain.

But at a time of rampant tech pessimism, even the smallest headwind can knock a company slightly off-course. Just ask IBM.

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Jacob Carpenter

NEWSWORTHY

Coming for password sharers. Netflix announced plans Monday to begin charging customers in five Latin American countries an extra fee if they use an account outside of their primary home, Bloomberg reported. The pilot program marks another step in the streaming giant’s effort to crack down on password sharing amid a slowdown in subscriber growth this year. Netflix, which is set to release its second-quarter earnings report after the bell Tuesday, is taking several steps to boost revenue following a 67% year-to-date decline in its share price.

A final holdout. Apple plans to take a more conservative approach to hiring and spending in some units next year, a rare move by the iPhone maker following years of rampant growth, Bloomberg reported Monday. Apple would join virtually all of the tech industry’s biggest companies in, at a minimum, slowing its spending growth in response to global economic uncertainty. Apple has not released specific spending plans, though it’s not expected to lay off employees.

Back to regular business. The Chinese government plans to ease harsh restrictions placed on ride-sharing company Didi, though the firm will be fined more than $1 billion for cybersecurity lapses, The Wall Street Journal reported Tuesday. The authoritarian government’s decision follows multiple sanctions levied against Didi last year as part of President Xi Jinping’s crackdown on powerful tech companies. The company will soon be able to add new users to its platform, and Chinese app stores will be allowed to make the Didi app available for download again.

Tidying the storefront. YouTube unveiled several new features Tuesday designed to amplify e-commerce on its video platform, including a partnership with Shopify, TechCrunch reported. The upgrades allow some creators to link to their Shopify storefront on their YouTube channel, while buyers will be able to make purchases without leaving the YouTube site. Alphabet-owned YouTube is aiming to make digital purchases more accessible through its platform and live streaming e-commerce events, while Shopify is striking deals designed to boost its market share against top rival Amazon.

FOOD FOR THOUGHT

A bit of progress. Human resources experts predicted that the shift to remote work could help increase corporate diversity, and early signs show that’s coming to fruition at Meta (at least a little). As The Washington Post reported Tuesday, officials at the Facebook and Instagram parent wrote in their latest diversity report that U.S. candidates who accepted remote job offers were “substantially more likely” to be Black, Hispanic, Native American, Alaskan Native, Pacific Islander, veterans, and/or people with disabilities. However, Meta didn’t release data showing how much impact the remote work option had on creating a more diverse workforce. Meta reported that Black, Hispanic, and multiethnic employees comprised 15.6% of all workers as of June, up from 14.8% last year.

From the article:

Among existing employees, people from underrepresented groups were more likely to opt to work remotely, according to (Facebook Chief Diversity Officer Maxine) Williams. She said the company is still studying why people from underrepresented groups are choosing remote work, but speculated some workers are seeking to locate where they feel more at home.

“Silicon Valley was never a place where Black people were predominant,” Williams said in an interview with The Post. “So you are seeing people choose places like Atlanta, New York.”

IN CASE YOU MISSED IT

Tesla’s potentially ugly Q2 earnings holds promise of light at the end of the tunnel—but investors will still have one question top of mind, by Christiaan Hetzner

One-time ‘Lunatic’ crypto booster Mike Novogratz says he was ‘darn wrong’ about the ‘full-fledged credit crisis’, by Taylor Locke

Why is the price of Ethereum soaring? Analyst cites ‘two certainties’, by Taylor Locke

There’s such a thing as too much sun for solar panels, and Europe’s solar industry is starting to buckle, by Tristan Bove

Chipmakers may finally get their $52 billion in CHIPS Act government subsidies—but companies like Intel are not happy about some of the strings attached, by Nicholas Gordon

Elon Musk’s Neuralink brain computer startup is beat again. This time a competitor implanted its device into its first U.S. patient, by Alena Botros

Indecision on China is costing Americans, by Jason Oxman

BEFORE YOU GO

Behind the times. Uncle Joe just isn’t trending with the youths on TikTok. As Politico noted Tuesday, the septuagenarian commander-in-chief has struggled to go viral on the Democratic National Committee’s TikTok account, another sign of his weakness with Gen Z voters who could be pivotal to a re-election campaign. The 45th president is often overshadowed by old stalwarts (Hillary Clinton, Chuck Schumer) and middle-aged Democratic pols (U.S. Reps. Tim Ryan of Ohio and Katie Porter of California) who produce buzzier video clips. White House officials note that Biden retains strong appeal on other social media sites, and that they’ve tried to keep him off platforms that don’t exactly fit the 79-year-old’s persona. A little more outreach might not hurt, though. In a New York Times/Siena College poll released last week, 94% of Democrats under the age of 30 said they didn’t want Biden to run again in 2024.