So much for tech stocks providing shelter from the stormy market. The tech-heavy Nasdaq is down nearly 15% since Jan. 1, and some of the sector's bellwethers are even more battered. Google (GOOG) shares are down 22% since the beginning of the year. Intel's (INTC) have dropped 24%. Microsoft (MSFT) and Amazon.com (AMZN) have each seen declines of nearly 30%.
The results are something of a surprise for a sector that initially looked like it would be a safe haven (BusinessWeek, 9/10/07) in a market battered by the credit crunch and U.S. economic slowdown. Tech stocks fared considerably better than the overall market during the initial stages of the downturn because of their relatively light debt loads, large cash stashes, and substantial operations in overseas markets. But as tech companies such as Google, Microsoft, and eBay (EBAY) prepare to kick off the second-quarter earnings season this week, technology stocks are getting pummeled.
Some of the factors that once buoyed tech stocks now threaten to sink them. Take revenues from overseas. Companies with a high percentage of foreign revenue have been helped by the dollar's slide, because revenues in other currencies add up to more dollars as the U.S. currency depreciates. But that trend may be reversing. Many economists believe the dollar is nearing the end of its lengthy decline against the euro, pound, and yen. Earlier this month, President George Bush and other world leaders reiterated plans to support the currency. "The dollar depreciation may have run its course," says Anant Sundaram, faculty director and finance professor at Dartmouth's Tuck Business School.
If the Dollar Rises…Investors are leery of a stronger dollar for a number of reasons. But the currency doesn't have to appreciate to hit earnings. Even stabilization at present levels would take away the extra lift some companies were getting from the currency's decline. If the dollar starts to rise against other major currencies, that would decrease the value of overseas revenues, crimping the U.S. financial figures investors watch. "If the dollar starts to appreciate, that will take a toll on tech earnings," says Sundaram. Among the tech companies that get more than half their revenues from overseas are Hewlett-Packard (HPQ), IBM (IBM), Motorola (MOT), Sun Microsystems (SUNW), and Autodesk (ADSK).
Investors often ignore currency effect when evaluating a company's value. But now many are spooked by the market's recent slide and the sharp decline in the stocks of mortgage financiers Fannie Mae (FNM) and Freddie Mac (FRE). So the prospect of a revenue drop from currency effects could hurt more than usual. "The dollar is treading water, but the calls have been mounting that it has gone [down] far enough," says Tim Boyd, an Internet analyst at American Technology Research. "Multinationals are going to get [hurt] when the dollar strengthens."
The market uncertainty has also made many investors less comfortable owning stocks that trade at relatively high multiples. In a strong economic climate, tech stocks can trade at prices more than 40 times their last year's earnings, since investors are expecting large profit growth in the next three to five years.
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