Here's Why The Strong U.S. Dollar Is Hurting Microsoft

April 13, 2015

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Here's Why The Strong U.S. Dollar Is Hurting Microsoft

CLSA Americas on Monday issued a company update on Microsoft Corporation (NASDAQ: MSFT) reducing earnings estimates due to the strong U.S. dollar. CLSA rates Microsoft as Outperform and lowered its price target from $51 to $50.

Analysts Ed Maguire and Clarence Chen wrote, “We’re trimming our forecasts a to reflect the impact of a stronger US dollar and PC market softness on the model. We’ve estimated incremental currency-related revenue impact of 1 percent and $0.01 on EPS. We’ve also trimmed forecasts to reflect sustained weakness in the global PC markets. We’ve left our cloud-related forecasts intact, as we think strong momentum around Azure and Office 365 could drive upside in this segment despite currency… lowering 3QFY15 revenues from $21.47 billion to $21.05 billion and reducing EPS from $0.53 to $0.52.

CLSA believes that the currency impact will hit the Commercial business the hardest and the PC market continues to face challenges. Despite the dual headwinds from currency and the PC market, Microsoft’s innovation pipeline is robust and well positioned to benefit from the transition to software, platform and infrastructure as a service.

Furthermore the pending launch of Windows 10, which is expected in June, along with new form factors should provide a lift to Microsoft. Windows PC operating systems and Office systems contributed about 19 percent and 28 percent of total company revenues in 2014.

In a Los Angeles Times article written by Tom Petruno, he discussed the strength of the U.S. dollar, saying, “The basic explanation for the return of the almighty dollar is that the U.S. economy is in better shape than most of the rest of the world, attracting investment and thereby raising demand for dollars. A standard assumption of capitalism is that money will go where it's treated best — the strongest economic growth, say, or the most attractive interest rates.

“Microsoft has been hurt because they receive greater than 25 percent of their sales from overseas. A rising dollar can hurt U.S. companies in two ways. One is a long-term effect of having their competitiveness eroded if foreign rivals can undercut them on price. The second is sales and earnings made overseas automatically shrink when translated to dollars in quarterly financial statements.”