The strengthening dollar may weaken Internet giants

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Google, EBay and Yahoo have gotten a big boost from a weak U.S. dollar. But the greenback comeback could spell trouble for these Internet giants.

So says Sanford C. Bernstein analyst Jeff Lindsay in a research note today. ‘Currency rates have had a significant positive impact on reported revenues for U.S. Internet companies over the last few quarters,’ he wrote. But this month the dollar started to gain ground against most other major foreign currencies.

Obviously, any company with significant international exposure could be at risk. Consider Hewlett-Packard: Last week it reported that its fiscal third-quarter revenue rose 10.5% from a year earlier to $28 billion, but without international currency translation, revenue grew at only half that rate. In fact, in a note published earlier this month, Bernstein analyst Toni Sacconaghi said the falling dollar had given a ‘material boost’ to revenue at U.S. technology companies over the last two years. HP, IBM and Sun Microsystems all generate more than 60% of their revenue outside the U.S.

Likewise, Internet companies have benefited from a weak dollar, reducing spending overseas and lowering tax rates. Also, Internet companies have a higher proportion of their costs in dollars and more of their revenue in foreign currencies.

Should the almighty dollar continue to restore its might, say by another 10% by the end of 2009 (Lindsay’s most pessimistic scenario -- pessimistic as far as Internet companies go), valuations could slip by 8% at EBay and 13% at Yahoo.

Why does the takeover-battered Yahoo get hit so hard? About 30% of its revenue comes from overseas, which is less than its peers, but Yahoo is the most vulnerable because of its Internet assets in Asia. The good news for Yahoo is that if the dollar starts to slide again, it will be in line for the biggest boost, Lindsay says.

And Teflon-coated Google? It gets more than half of its revenue from overseas but isn’t troubled by currency movements because it’s just so darn profitable.

-- Jessica Guynn