Weak US Dollar will supercharge Apple's already hot overseas revenues

Posted:
in AAPL Investors edited January 31
Over the past year, the weakening U.S. dollar has created an increasingly favorable currency exchange environment boosting the value of Apple's foreign revenues as stated in dollars. That will have a significant impact on the company's quarterly earnings reported tomorrow.


Euro has reached a three year high against the U.S. dollar

Unclear policy, clear downward trajectory

Political turmoil in the United States is weakening the value of American currency. Speaking at a press conference at the World Economic Forum in Davos last week, U.S. Treasury Secretary Steven Mnuchin stated, "obviously a weaker dollar is good for us as it relates to trade and opportunities," adding that its short-term value is "not a concern of ours at all."

Shortly afterward, President Trump told reporters Mnuchin's comments were "misinterpreted" and stated that "the dollar is going to get stronger and stronger, and ultimately I want to see a strong dollar."

At the same time, Trump also announced last April, "I think our dollar is getting too strong, and partially that's my fault because people have confidence in me. But that's hurting-- that will hurt ultimately."

Those comments were made after four months of the dollar sliding against other currencies. They also helped stoke a further drop in valuation. And since then, the U.S. dollar has been on a generally negative trajectory--not unrelated to the lack of any clear U.S. policy.

Apple's foreign currency headwinds change course

The formerly strong U.S. dollar began to have a notable impact on Apple's earnings reports starting in 2014, and has repeatedly been cited by the company as negatively affecting its earnings in a number of ways. So for Apple, a weaker dollar is a welcomed change. The formerly strong U.S. dollar began to have a notable impact on Apple's earnings reports starting in 2014 and has repeatedly been cited by the company as negatively affecting its earnings

In its Fiscal 2014 10K filing, the company noted that weakening foreign currencies "adversely affects the U.S. dollar value of the Company's foreign currency-denominated sales and earnings," and added that a stronger dollar generally results in the company being forced to raise its prices overseas, with the potential result of reducing demand as buyers balk at paying more for the same thing.

In 2015, the strengthening dollar caused Apple to raise prices in its stores ranging from Australia, Canada, New Zealand, France, Denmark, Sweden, Finland and Portugal.

In the summer of 2016, Britain's vote to leave the European Union caused the British Pound to fall dramatically against the dollar, resulting in an up to 20 percent price hike on some Mac models in the U.K., followed by a 25 percent hike in price tiers in its App Store earlier this year.

Last January, Apple's chief executive Tim Cook noted that China's currency had devalued by 6 percent year over year compared to the dollar. The shift was large enough to prompt the company to report non-GAAP earnings on a constant currency basis to isolate its actual performance from the currency shifts out of its control.

Other American companies operating internationally have suffered from the same unfavorable currency headwinds, although Apple generally weathered these fluctuations better than many of its peers simply because it is so profitable and because it has the capital and credit to enter long-term hedging contracts to mitigate risk.

At the same time, the impact of foreign currency shifts in China has been a much larger issue for Apple than companies like Facebook, Google, Microsoft and U.S. hardware makers--few of whom have been able to materially penetrate the Chinese market at all, let alone making it a leading chunk of their business.

Apple also took advantage of the stronger dollar's purchasing ability to invest in large infrastructure, production and retail projects internationally, including a series of new retail stores in China, its massive new Battersea Power Station development in London, and a string of research and development facilities being built around the world.

American political chaos disrupting markets

Strong earnings in the year-ago winter quarter jolted Apple's stock price upward despite foreign currency headwinds. Apple shares continued to rise on apparent optimism that a new Republican president--backed by Republican control of both chambers of Congress--could quickly implement business-friendly tax breaks, including lower repatriation rates on Apple's very large overseas earnings.

However, that optimism turned out to be misplaced. Efforts to slash health care spending to enable very large tax breaks was derailed by populist resistance that fragmented the controlling political party, delaying the passage of health care cuts and efforts to shift tax policy to the end of 2017.

Proposed travel bans, restrictions on visas, the halting of infrastructure spending and the postponement of a repatriation tax holiday that Apple and other Silicon Valley companies had been working with Hillary Clinton to draft as part of a series of tech-friendly policy positions remained causes for concern throughout the year.

American political turmoil began hurting the dollar's valuation. That has had a positive impact on Apple's global profitability for nearly a year now, even if it also has increasingly made it more expensive for Americans to travel abroad or buy foreign products.American political turmoil is hurting the dollar. That has had a positive impact on Apple's global profitability

The Euro, which nearly reached $1.40 in early 2014, fell down to $1.04 at the end of 2016. Today it's now back up above $1.24, a three year high against the dollar.

The British Pound, which reached $1.71 in 2014, fell as low as $1.22 after Brexit but has since inched back up to $1.42.

The Japanese Yen reached up to 124 in 2015, then collapsed to nearly 100 in the winter quarter of 2016; over the holiday season it reached as high as 113 against the U.S. dollar.

China's RMB steadily depreciated against the USD since 2014 when reached as low as 6.11. It climbed to 6.94 against the USD last January. Today, the Chinese Yuan Renminbi is also approaching a three year high at 6.28 against the USD.

A weaker dollar means that Apple is now making more money (as enumerated in dollars) in a variety of territories at its current prices. It also holds the potential for Apple to lower its prices on hardware and apps overseas, a move that could be expected to induce demand. It remains to be seen how the U.S. dollar will compare going forward, but Apple is no doubt relieved to see more favorable exchange rates that will help it to boost its ability to earn money overseas.
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Comments

  • Reply 1 of 21
    A weak dollar makes exports more competitive but to exploit this they need to reduce prices to increase sales. Apple increased UK prices in 2016 after the £ devaluation following Brexit but despite the dollar weakening since prices remain high in the UK - notably high - I was always an early adopter but no longer, the cost makes you think twice.

    The only product which occurred to me that was lower than anticipated was the HomePod which I expected to be £349 to follow the previous $ parity trend, but it is £319 in the UK. Still probably £19 too much however.
    propod
  • Reply 2 of 21
    jwdawsojwdawso Posts: 355member
    I like all of DEDs article - always provides a good context and thoughtful analysis. I don’t agree with the “political turmoil” cause - looking historically over the last 40 years, nothing much has changed. The business and investor judgement can be quantified by the stock market. Currency fluctuations are complex, and single issue blame is usually too simplistic unless there is a war involved. 

    Another great article - thanks ai and DED!
    edited January 31 muthuk_vanalingamracerhomie3JWSCjony0
  • Reply 3 of 21
    Pretty great timing for Apple since they are now returning millions/billions of dollars back to the USA.
    randominternetperson
  • Reply 4 of 21
    Political turmoil in the United States is weakening the value of American currency. Speaking at a press conference at the World Economic Forum in Davos last week, U.S. Treasury Secretary Steven Mnuchin stated, "obviously a weaker dollar is good for us as it relates to trade and opportunities," adding that its short-term value is "not a concern of ours at all."
    "Political turmoil" is not causing a weak dollar. That's what caused an "emotionally driven" spike. What actually does cause the value of the dollar to fluctuate, you ask?
    • Supply and demand factors
    • Sentiment and market psychology
    • Technical factors
    https://www.investopedia.com/articles/forex/09/factors-drive-american-dollar.asp

    And without getting too far into the weeds, the US dollar being a fiat currency which is backed by nothing more than the so-called "full faith and credit of the US government" does it no favors.

    Let's take a look at another set of facts. Federal Reserve policies have driven the value of the dollar to almost nothing compared to its value in 1913. For fun, just type in the year you were born and see how much the purchasing power of the dollar has dropped since then:

    http://www.usinflationcalculator.com
    edited January 31
  • Reply 5 of 21
    What actually does cause the value of the dollar to fluctuate, you ask?
    Just simplify things: “The Federal Reserve.”
    SpamSandwich
  • Reply 6 of 21
    anomeanome Posts: 1,094member
    A weak dollar makes exports more competitive but to exploit this they need to reduce prices to increase sales. Apple increased UK prices in 2016 after the £ devaluation following Brexit but despite the dollar weakening since prices remain high in the UK - notably high - I was always an early adopter but no longer, the cost makes you think twice.

    The only product which occurred to me that was lower than anticipated was the HomePod which I expected to be £349 to follow the previous $ parity trend, but it is £319 in the UK. Still probably £19 too much however.
    I expect you'll see a correction as they announce new products during the year. That's what they've historically done with Australian prices. It's too complicated to just change prices unless there's a huge change in the exchange rate. There was a product line wide price correction a few years back, about the time the Australian dollar hit parity with the US dollar, but mostly they wait for a new version to correct the price.
  • Reply 7 of 21
    Pretty great timing for Apple since they are now returning millions/billions of dollars back to the USA.

    Ugh, it's the viewpoint that's toxic and very American. They are not "returning" money. It's money earned oversees, from other countries, from other people's hard work and sacrifices that they trade to buy Apple products and services. The US government is not automatically entitled to a portion on that revenue.


    sphericpropod[Deleted User]jony0
  • Reply 8 of 21
    In 2015, the strengthening dollar caused Apple to raise prices in its stores ranging from Australia, Canada, New Zealand, France, Denmark, Sweden, Finland and Portugal.

    Think they will lower prices? Not a chance!
    propodavon b7[Deleted User]
  • Reply 9 of 21
    asdasdasdasd Posts: 5,102member
    Pretty great timing for Apple since they are now returning millions/billions of dollars back to the USA.

    Ugh, it's the viewpoint that's toxic and very American. They are not "returning" money. It's money earned oversees, from other countries, from other people's hard work and sacrifices that they trade to buy Apple products and services. The US government is not automatically entitled to a portion on that revenue.


    It’s the way corporation tax works. And should work. The rest of the world earn taxes on their products sold abroad. It was always insane to assume that this didn’t apply to US companies  alone. 
  • Reply 10 of 21
    Political turmoil in the United States is weakening the value of American currency. Speaking at a press conference at the World Economic Forum in Davos last week, U.S. Treasury Secretary Steven Mnuchin stated, "obviously a weaker dollar is good for us as it relates to trade and opportunities," adding that its short-term value is "not a concern of ours at all."
    "Political turmoil" is not causing a weak dollar. That's what caused an "emotionally driven" spike. What actually does cause the value of the dollar to fluctuate, you ask?
    • Supply and demand factors
    • Sentiment and market psychology
    • Technical factors
    https://www.investopedia.com/articles/forex/09/factors-drive-american-dollar.asp

    And without getting too far into the weeds, the US dollar being a fiat currency which is backed by nothing more than the so-called "full faith and credit of the US government" does it no favors.

    Let's take a look at another set of facts. Federal Reserve policies have driven the value of the dollar to almost nothing compared to its value in 1913. For fun, just type in the year you were born and see how much the purchasing power of the dollar has dropped since then:

    http://www.usinflationcalculator.com
    Sounds like you're saying the Executive Branch has no impact on the value of the dollar. It's all the genius hand of the market (supply and demand!) sentiment, technical features. And you say a fiat currency has a valuation set at the whim of the market. 

    But then you say the Federal Reserve has been running the show, driving up inflation (apparently a secret to you?).

    Which is your actual opinion of how money works, because those two sound mutually exclusive. 

    Also, do you not realize inflation is purposely coaxed into existence to spur investment, so people don't just sit on their capital? And what exactly are you saying with the rest of those words?  

    davenradarthekatpropodjony0
  • Reply 11 of 21
    A weak dollar makes exports more competitive but to exploit this they need to reduce prices to increase sales. Apple increased UK prices in 2016 after the £ devaluation following Brexit but despite the dollar weakening since prices remain high in the UK - notably high - I was always an early adopter but no longer, the cost makes you think twice.

    The only product which occurred to me that was lower than anticipated was the HomePod which I expected to be £349 to follow the previous $ parity trend, but it is £319 in the UK. Still probably £19 too much however.
    Apple appears to want to avoid frequently changing the prices of its offerings (it's like the Anti-Amazon!). It has been forced to shift basic prices up as currency exchange rates shift dramatically enough. But those prices don't quickly follow the market in either direction. The fact that HomePod is appearing at a more attractive price than expected is probably largely due to the fact that the Pound is stronger now, as it is being launched. Other prices are likely to be adjusted to current FX rates when they are next refreshed, or at a point where it looks like things have stabilized. Apple wants prices to be low because that drives volumes of sales. But it's not going to suffer toward low profits if exchange rates make it impossible to make money selling a product at a given exchange rate adjusted price. 

    Guarding margins is a primary reason Apple is the only computer brand to survive for so long. Atari, Amiga, IBM, Gateway, Tandy, Compaq, Motorola all gone but for a brand name.
    radarthekatpropod
  • Reply 12 of 21
    A very objective well written summary of the dollar impact on Apple with no political ax grinding. And a very important fact heading into earnings, at a time when most stories are pure market manipulation.
  • Reply 13 of 21
    radarthekatradarthekat Posts: 2,529moderator
    Here in the Philippines the peso has been weakening; the dollar buys 51.30 Philippine pesos today versus 47.50 pesos when I arrived here in September 2016, 16 months and one very significant Philippines election ago.  The strongman president Duterte, elected into office last June, seems to be having the same affect on the local currency as Trump is having on the dollar.  Birds of a feather...

    But I can’t complain; I’m benefiting from the combination of a weak dollar, bolstering the overseas incomes of my stock portfolio of large-cap US businesses (AAPL, AMGN, GILD, IBM and WFC), along with the weak Philippine peso, bolstering my buying power here in the beautiful islands where I live a relaxing and adventurous life, retired young from the hyper-fast-paced world of internet startups back in the states.  #NeverGoingHome  
    edited January 31
  • Reply 14 of 21
    Pretty great timing for Apple since they are now returning millions/billions of dollars back to the USA.

    Ugh, it's the viewpoint that's toxic and very American. They are not "returning" money. It's money earned oversees, from other countries, from other people's hard work and sacrifices that they trade to buy Apple products and services. The US government is not automatically entitled to a portion on that revenue.


    That’s kind of the whole point, isn’t it? That money being “held overseas” would be better spent in the US (from the US point of view) and used to build up a newly strengthened economy than wait for the EU to blackmail US businesses or use other confiscatory means to get their mitts on that money.
    edited January 31
  • Reply 15 of 21
    asdasdasdasd Posts: 5,102member
    A weak dollar makes exports more competitive but to exploit this they need to reduce prices to increase sales. Apple increased UK prices in 2016 after the £ devaluation following Brexit but despite the dollar weakening since prices remain high in the UK - notably high - I was always an early adopter but no longer, the cost makes you think twice.

    The only product which occurred to me that was lower than anticipated was the HomePod which I expected to be £349 to follow the previous $ parity trend, but it is £319 in the UK. Still probably £19 too much however.
    Apple appears to want to avoid frequently changing the prices of its offerings (it's like the Anti-Amazon!). It has been forced to shift basic prices up as currency exchange rates shift dramatically enough. But those prices don't quickly follow the market in either direction. The fact that HomePod is appearing at a more attractive price than expected is probably largely due to the fact that the Pound is stronger now, as it is being launched. Other prices are likely to be adjusted to current FX rates when they are next refreshed, or at a point where it looks like things have stabilized. Apple wants prices to be low because that drives volumes of sales. But it's not going to suffer toward low profits if exchange rates make it impossible to make money selling a product at a given exchange rate adjusted price. 

    Guarding margins is a primary reason Apple is the only computer brand to survive for so long. Atari, Amiga, IBM, Gateway, Tandy, Compaq, Motorola all gone but for a brand name.
    sure but is is annoying. I am buying a new MacBook Pro and the lowest model, which is fairly gimped, is 1.5K€

    There was a time when prices were trending lower than 1K here, particularly with the Air. 
    avon b7
  • Reply 16 of 21
    avon b7avon b7 Posts: 2,641member
    A weak dollar makes exports more competitive but to exploit this they need to reduce prices to increase sales. Apple increased UK prices in 2016 after the £ devaluation following Brexit but despite the dollar weakening since prices remain high in the UK - notably high - I was always an early adopter but no longer, the cost makes you think twice.

    The only product which occurred to me that was lower than anticipated was the HomePod which I expected to be £349 to follow the previous $ parity trend, but it is £319 in the UK. Still probably £19 too much however.
    ... Guarding margins is a primary reason Apple is the only computer brand to survive for so long. Atari, Amiga, IBM, Gateway, Tandy, Compaq, Motorola all gone but for a brand name.
    It's worth noting that a huge part of those margins were mobile margins. Without the iPhone, and the umbrella it has provided, it's possible that Apple as a computer brand could be in the same boat as those you mentioned. Perhaps that is what you are actually saying here, though.

    The iPhone (and  iPod and iPad) have definitely lead to increased sales of Macs but it is my firm belief that, as a computer brand, the Mac has underperformed. As a multi-billion dollar in its own right, personally, I would prefer to see it taken out of the shadow of iPhone and see it improve performance.
    muthuk_vanalingam
  • Reply 17 of 21
    asdasdasdasd Posts: 5,102member
    avon b7 said:
    A weak dollar makes exports more competitive but to exploit this they need to reduce prices to increase sales. Apple increased UK prices in 2016 after the £ devaluation following Brexit but despite the dollar weakening since prices remain high in the UK - notably high - I was always an early adopter but no longer, the cost makes you think twice.

    The only product which occurred to me that was lower than anticipated was the HomePod which I expected to be £349 to follow the previous $ parity trend, but it is £319 in the UK. Still probably £19 too much however.
    ... Guarding margins is a primary reason Apple is the only computer brand to survive for so long. Atari, Amiga, IBM, Gateway, Tandy, Compaq, Motorola all gone but for a brand name.
    It's worth noting that a huge part of those margins were mobile margins. Without the iPhone, and the umbrella it has provided, it's possible that Apple as a computer brand could be in the same boat as those you mentioned. Perhaps that is what you are actually saying here, though.

    The iPhone (and  iPod and iPad) have definitely lead to increased sales of Macs but it is my firm belief that, as a computer brand, the Mac has underperformed. As a multi-billion dollar in its own right, personally, I would prefer to see it taken out of the shadow of iPhone and see it improve performance.
    He has a point on the profits though. The race to the bottom of the original home computer brands bankrupted them all, what emerged in the 1990s was the surviving expensive options. 

    However there is a time to reduce profits for share and Apple missed that in the mid 90s. Hindsight is 20-20 as always.
  • Reply 18 of 21
    Political turmoil in the United States is weakening the value of American currency. Speaking at a press conference at the World Economic Forum in Davos last week, U.S. Treasury Secretary Steven Mnuchin stated, "obviously a weaker dollar is good for us as it relates to trade and opportunities," adding that its short-term value is "not a concern of ours at all."
    "Political turmoil" is not causing a weak dollar. That's what caused an "emotionally driven" spike. What actually does cause the value of the dollar to fluctuate, you ask?
    • Supply and demand factors
    • Sentiment and market psychology
    • Technical factors
    https://www.investopedia.com/articles/forex/09/factors-drive-american-dollar.asp

    And without getting too far into the weeds, the US dollar being a fiat currency which is backed by nothing more than the so-called "full faith and credit of the US government" does it no favors.

    Let's take a look at another set of facts. Federal Reserve policies have driven the value of the dollar to almost nothing compared to its value in 1913. For fun, just type in the year you were born and see how much the purchasing power of the dollar has dropped since then:

    http://www.usinflationcalculator.com
    Sounds like you're saying the Executive Branch has no impact on the value of the dollar. It's all the genius hand of the market (supply and demand!) sentiment, technical features. And you say a fiat currency has a valuation set at the whim of the market. 

    But then you say the Federal Reserve has been running the show, driving up inflation (apparently a secret to you?).

    Which is your actual opinion of how money works, because those two sound mutually exclusive. 

    Also, do you not realize inflation is purposely coaxed into existence to spur investment, so people don't just sit on their capital? And what exactly are you saying with the rest of those words?  

    Regarding the part I bold-ed: A lot of people, in my estimation most, don't understand that basic and important reality. Modest inflation is important as a way of discouraging those who hold society's accumulated wealth from just sitting on it, so to speak. It encourages them to put it to work within the economy (in a more dynamic way).

    Continued and increased economic prosperity depends, to a significant degree, on things done tomorrow having a slightly greater (retained) value than things done yesterday did. That's what encourages people to do more today. The difference can't be too large (because today is tomorrow's yesterday, just as it is yesterday's tomorrow), but there needs to be a difference. That is what inflation represents, a relative weighting of the value of things done tomorrow versus the value of things done yesterday.
  • Reply 19 of 21

    asdasd said:
    Pretty great timing for Apple since they are now returning millions/billions of dollars back to the USA.

    Ugh, it's the viewpoint that's toxic and very American. They are not "returning" money. It's money earned oversees, from other countries, from other people's hard work and sacrifices that they trade to buy Apple products and services. The US government is not automatically entitled to a portion on that revenue.


    It’s the way corporation tax works. And should work. The rest of the world earn taxes on their products sold abroad. It was always insane to assume that this didn’t apply to US companies  alone. 
    The governments of most other advanced economies don't, generally speaking, tax income generated abroad. Most had moved to (some form of) a territorial taxation system, rather than the kind of extraterritorial taxation system which we still used.
  • Reply 20 of 21

    Pretty great timing for Apple since they are now returning millions/billions of dollars back to the USA.
    Apple's cash holdings are generally held in (U.S.) dollar-denominated securities. So a weakening (U.S.) dollar doesn't really help Apple a lot when it comes to repatriating existing, as-yet unremitted, foreign earnings. It helps in other ways, as the OP describes, though.
    edited February 5
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