Microsoft (MSFT -1.66%) shares are under pressure on Thursday after the software company lowered expectations for the current quarter. It will reveal these findings in July.
Microsoft has a healthy balance sheet, and this appears to be only a minor hiccup in what is already an outstanding business success story. However, the reason for the warning is likely to ripple through a wide range of businesses during the second quarter. Microsoft is raising the alarm about how a strong U.S. dollar will affect results.
Lost in translation
Microsoft cut its fiscal fourth-quarter earnings per share forecast to $2.24 to $2.32 per share, down from $2.28 to $2.35, and revenue guidance to $51.94 billion from $52.74 billion, which was decreased from $52.4 billion to$53.22 billion in a market update published Thursday morning. Analysts had been anticipating numbers that were above the current range, with the average forecast prior to the announcement being $2.33 per share in earnings on $52.87 billion in sales.
Microsoft blames the anticipated deficit on the rates it is receiving as it converts proceeds earned in other countries to U.S. dollars, according to Business Insider. The ongoing conflict between Ukraine and Russia has prompted investors to favor the greenback over foreign currencies by a considerable margin. Historically, the United States dollar has been known as a secure haven during tumultuous times, and rising interest rates only enhance its appeal as an attractive location for money to go.
A strong dollar is credited with assisting U.S. consumers, who may now buy foreign-produced goods at cheaper rates. However, it makes US products more expensive in other countries and limits the amount of money earned by American firms for items that they export.
Microsoft is still an attractive buy
Long-term Microsoft investors need not be concerned about this change. The lowered targets are less than a 2% decrease on the low end, and even at $2.24 per share would indicate 3% growth over the same three months last year.
Microsoft has over $130 billion in cash and investments on its books, and it generated over $20 billion in free cash flow during the most recent quarter.
The big question is whether or not foreign exchange rates, and specifically the pound’s decline, will have an impact on the quarter. This is a mature, developing technology giant with a price-to-sales ratio of ten. Any market downturn resulting from concerns would be good for a buy-and-hold investor looking out years rather than quarters.