Internet Stocks Could Suffer If The Buck Strengthens

The weakness of the U.S. dollar in 2007 provided a nice boost to the top-line growth rates for Google (GOOG), Amazon.com (AMZN), eBay (EBAY) and, to a lesser degree, Yahoo (YHOO). So what happens if the buck starts to strengthen?

In an interesting piece this morning, Lehman’s Douglas Anmuth takes a look at what would happen to the financial results of the major Internet companies if the dollar turned around and strengthened against the other major currencies. A 10% appreciation in the greenback, Anmuth calculates, would chop revenue growth by 7% at Google, 6% at eBay and Amazon, and 3% at Yahoo.

In 2007, Anmuth notes, the dollar fell 9% against the Euro and the British pound, while holding steady against the yen. He notes that eBay, which recently has generated about 51% of revenue overseas, reported 29% growth in 2007, but would have grown just 24% on a currency-neutral basis. Amazon, likewise, grew 39%, but would have grown 34.9% in a constant currency world. Google’s growth rate would have dropped to 51%, from 56%; Yahoo would have grown 7%, not 8%.

Anmuth also notes that the Internet companies are building up substantial cash balances overseas that can’t easily be deployed for buying back stock, paying dividends or other capital allocation moves. At the end of 2007, he notes, Amazon had $1.2 billion - 37% of its cash - in foreign denominated marketable securities. And he says eBay at the end of Q3 had $3.7 billion of its $4.4 billion in cash invested overseas.

Anmuth’s conclusion: “While currency movements can clearly be unpredictable, given weakness in the U.S. dollar in 2007 there may be greater risk to the downside on a reported basis for Internet companies - specifically Google, eBay and Amazon - should the U.S. dollar stabilize or recover beyond what is embedded in current estimates.”