Impact of Weak Dollar

Seems that JPMorgan piggy backed on my idea (see write-up here) that investors should start thinking about the impact of the falling dollar on Tech companies in 4Q and 2009. They think that Priceline will benefit the most given that international gross bookings account for 60% of total company bookings. eBay will have a modest impact on revenue and profitability; Amazon will have a muted impact in 4Q but benefit in 2009; Google will benefit the least because of its current currency hedging program.

The likelihood that the dollar goes into a tailspin next year is high and that is likely to give a boast to Tech estimates but this needs to be balanced with the continued economic pressures outside the U.S.

From JPMorgan Analyst Imran Khan
In a quarter filled with headwinds to Internet sector performance, a potential
positive impact may come in the form of foreign exchange rates. During 4Q, the
Euro/Dollar exchange rate fell to a low of $1.23 but has rebounded nicely with
December 18th posting an exchange rate of $1.43. We think that the dollar will
likely remain weak as the Fed pursues options to spur the flagging economy.
Thus, we may see upside to 4Q and F’09 revenue growth estimates. Below we
take a look at the FX impact on internet stocks with significant international
exposure.

We think the biggest beneficiary will be Priceline. Our Priceline 4Q estimates
and management guidance were based on an exchange rate of $1.29. As the
average exchange rate for the quarter was $1.30, we think dollar weakness will
only minimally benefit top-line growth (int’l gross bookings are ~60% of total
gross bookings) and lower the other income line which accounts for hedging
profits. Our F’09 estimates are based on an average exchange rate of $1.28;
thus, if the FX rate increases to $1.40, this would increase our F'09 int’l gross
booking growth estimate from (7%) to 2% and raise our pro forma EPS estimate
to ~$5.97 from $5.64.

Modest revenue impact; could help profitability at eBay. Our 4Q’08
estimates were predicated on a $1.30/€ exchange rate. With much of the holiday
shopping season already behind us, we do not expect to see more than a $10M
boost to our 4Q revenue estimate if the past week’s dollar weakness persists
through the remainder of the quarter. We expect international will represent 53%
of F’08 revenue, with ~43% from the UK or Euro area. For F’09, we think if the
full-year € and £ exchange rates stay at current levels ($1.40/€ and $1.50/£), it
would boost our Y/Y revenue growth estimate by ~2%. Currently we are
modeling 10% global revenue growth in F’09. Due to a more limited localcurrency
cost base, we think profitability could see a slightly larger impact.

Muted 4Q impact at Amazon; positive for F’09. Our 4Q’08 estimates were
predicated on a $1.30/€ exchange rate. We believe the impact of the recent FX
move is likely to be immaterial for Amazon revenue in 4Q’08, significantly less
than 1% of our $6.65B estimate. Amazon’s 4Q guidance anticipates a >500 bp
headwind to overall revenue growth from FX; based on current rates we expect
the headwind to be ~550 bps. We expect 47% of Amazon F’08 revenue to come
from outside North America, with ~41% from either the UK or Euro area. For
F’09, we think that if the full-year € and £ exchange rates stay at current levels
($1.40/€ and $1.50/£), it would boost our Y/Y overall growth rate estimate by
~2%. Currently we are modeling 18% global revenue growth in F’09.

Google should not see much of an EPS impact. Roughly 30% of Google revenue
is Euro-denominated. Our 4Q’08 and F’09 estimates were based on an exchange
rate of $1.30. Therefore, the average 4Q exchange rate is tracking in line with our
estimates. In F’09, we do not see much of a currency benefit even though the
exchange rate is tracking 8% ahead of our estimates as Google has engaged in
extensive hedging activities to offset the impact of the strengthening dollar. Google
established 18-month hedges to earnings in Canadian dollar, Euro, and British
pound currencies. At maturity, any unrealized gain from the options is recognized
as domestic revenue. Thus, we think any foreign exchange benefit to int’l revenue
will be partially offset by not recognizing unrealized gains from options as
domestic revenue.