Does no-hedge strategy stack up for mag seven mavericks?

At Amazon, Meta and Tesla, the lack of FX hedging might raise eyebrows, but isn’t necessarily a losing technique

The so-called magnificent seven – the seven largest US tech companies that famously make up more than a third of the S&P 500 by market cap – are among the world’s largest firms. They also have some of the greatest geographical distributions – in some cases operating in over 100 countries.

Yet filings for these tech giants show that three of them – Amazon, Meta and Tesla – choose not to hedge their day-to-day foreign exchange exposures. They reveal no holdings of offsetting FX derivatives anywhere. Tesla even states outright in its filings that it doesn’t typically hedge FX risk.

This was news to the head of FX at one dealer firm and the structuring head at another. The head of FX at one US large-cap corporate says he was also surprised when he first found out.

“One of the things that surprised me was how blasé tech companies in general are about hedging,” says the FX head. “I had a colleague who used to look after FX for one of the mag seven firms that explained to me that they didn’t hedge at all, which absolutely shocked me.”

The general explanation is a lack of interest in FX translation effects on the part of investors and stock analysts – that most of their focus is on maintaining top-line earnings growth.

The broad expectation for a company that doesn’t hedge its FX exposures is that it would demonstrate greater earnings volatility – something generally frowned upon by analysts and investors. But a Risk.net analysis of FX translation gains and losses as a proportion of revenue shows that volatility for Amazon, Meta and Tesla was either in line with FX-hedging peers, such as Alphabet and Apple, or only slightly above.

If the magnitude is fractions of a fraction of a penny a share, is it that big a deal?

Amol Dhargalkar, Chatham Financial

Dealers say that while it would of course be more prudent to hedge, it’s nonetheless possible to rely on correlations and offsetting revenues and expenses.

Firms can also structure their business so that cost and revenue bases are aligned – reducing FX risk – but this is not always possible for US companies where the dollar is dominant.

Under US generally accepted accounting principles, the treatment of foreign exchange effects can get complex quite quickly, but these principles broadly affect a company’s financial statements in three ways.

For the income and cashflow statements, earnings and costs are converted at the exchange rate at the time they’re incurred and reported directly in the statement.

On the balance sheet, monetary assets and liabilities such as cash, loans and bond issuances are converted at the period-end exchange rate.

Non-monetary assets, such as inventory, warehouses or factories, can remain reported at their historic rate at the time of purchase but can hit earnings if they’re sold. Carve-outs also exist, for example for countries considered to be subject to hyperinflation.

Dual camps

Looking at financial filings among the mag seven US tech stocks, most have disclosures acknowledging their use of derivatives instruments, such as FX forwards and options, to hedge certain exposures to fluctuations in foreign exchange rates.

In its most recent 10-K, Nvidia, for example, says it enters foreign currency forward contracts to mitigate the impact of currency exchange rate movements on its operating expenses. In its own 10-K, Alphabet discloses its use of both FX forwards and option contracts – including collars – to protect forecasted US dollar-equivalent earnings from changes in FX rates.

Apple’s 2024 10-K also discloses use of foreign currency forwards and options.

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These four firms’ most recent filings show the gross notional volumes of derivatives contracts designated as hedging instruments total $1.2 billion for Nvidia, $1.4 billion for Microsoft, $18 billion in Alphabet’s case and $64 billion for Apple.

Their balance sheets are all denominated in US dollars, meaning foreign assets and earnings must be translated back into US dollars for reporting purposes.

Yet for Amazon, Meta and Tesla, there is no evidence of such FX hedging activity.

The three firms did not respond to requests for comment for this article, but dealers and industry insiders confirm their apparent lack of hedging activity.

Francis Mallon, head of corporate FX sales Americas at Crédit Agricole CIB, says it would be unusual for these firms to be hedging with no footprint in their financial statements.

“If they were hedging actively, it would be expected to be found in their financials. If they had a large book of outstanding derivatives, it would be there,” says Mallon.

The decision not to hedge their FX exposures is no accident, he says – rather it is a conscious decision relating to the firms’ strategy and operations. The tech giants are all quantifying and monitoring their risk on an ongoing basis. Choosing not to make use of derivatives is an active decision that is certain to have been approved by their board and management constituents.

Other sources say the choice not to hedge can also be a way for senior management to send a message about what they consider important to the firm and where they want their time and resources focused. It is possible they feel that they can deliver a message to the street to look through any earnings volatility associated with foreign exchange.

Some of these names haven’t stopped their growth trajectory in the traditional way you would expect

Mimi Rushton, Barclays

There’s no question that currency movements can have an impact on the bottom line. For some firms, based on the structure of pricing and costs, they can be impacted in different ways. But what really matters is the magnitude of the impact of those costs, and whether investors and analysts care that deeply about them.

“If the magnitude is fractions of a fraction of a penny a share, is it that big a deal?” says Amol Dhargalkar, managing partner and chairman at Chatham Financial. “If the magnitude is significant relative to earnings, on the face of it that may seem like a big deal. But ultimately it is what matters to investors and their expectations that guide decision-making.”

Mimi Rushton, global head of FX distribution and co-head of the global risk solutions group at Barclays, says that for smaller tech firms that are in a high-growth stage, the focus is first and foremost on growth. Growth-stage firms won’t want to reduce or stem any marginal gains you might achieve, by using derivatives, she notes.

Eventually, as growth begins to plateau and firms reach a pre-IPO stage, consistency becomes more paramount, which is where Rushton sees them begin to have conversations regarding hedging policies.

“Now, with US tech in particular, some of these names haven’t stopped their growth trajectory in the traditional way you would expect,” says Rushton. “As a consequence, it means FX hedging still hasn’t reached that pinnacle of prioritisation.”

Considering both the board and shareholder perspective when examining high-growth tech stocks and weighing prospective shareholders’ reasons for deciding to invest, currency isn’t a big barometer, she adds.

“In fact, they probably want the currency diversification that exists in their revenues, and they want that growth focus,” says Rushton. “So, they won’t necessarily reward or punish the company for their risk management philosophy or capabilities.”

The head of FX at the US corporate adds that even as firms spend a significant amount of time devising complex FX hedging programmes, analysts and investors simply never ask about or consider them in their assessments.

“I sit right beside and engage with our investor relations team. And I ask them the question: ‘Do they ever ask about FX?’ And the IR team consistently indicates ‘no’. They just look through it and indicate that, as the business is still growing 16 to 20%, they’re not worried about it.”

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“Some have a philosophy of, ‘why bother hedging?’ when it all comes out in the wash anyway. Investors don’t really care about your hedge results because your margins are so wide,” he says. “What they care about is the underlying business.”

And while Amazon, Tesla and Meta show no evidence in recent financial filings of day-to-day FX hedging, it’s possible they might enter idiosyncratic event-driven hedges that do not show up in the filings.

For a firm looking at an acquisition in the local currency of an emerging market jurisdiction – even if they traditionally don’t hedge exposures – there is typically a dollar amount they would want to pay for that asset and they would not necessarily want to be unhedged until the transaction closes.

“In these situations, it makes a ton of sense to do that FX hedge,” says Barclays’ Rushton. Similarly, they might put on a hedge relating to a dividend or a strategic, one-off flow, she adds. “These types of exposures are less to do with regular transactions, and more to do with something specific happening in the firm.”

A fistful of dollars

For US dollar-denominated firms, a rising dollar, such as was seen in 2022, means losses on foreign exposures as they are translated back. A weakening dollar, as seen in 2023, has the opposite effect.

Risk.net examined the filings of Amazon, Meta and Tesla and measured the proportion of FX translations versus net revenues across the last five years of quarterly and annual filings.

The swings in dollar strength can be seen in the size and direction of FX translation impacts. But our study demonstrates that these impacts aren’t necessarily outsized when compared to similar companies that routinely hedge their FX risks.

 

Naturally, the caveat is that companies are not perfectly comparable and may make slightly different accounting interpretations when calculating FX translation costs, but it offers a useful insight into the impact on revenues of FX hedging.

Differentials between the impacts on the three firms and other companies range from tenths of a percentage point up to three percentage points – and only a few exceptions reaching 4–5%.

Looking at third-quarter filings for 2024, Amazon, Tesla and Meta saw positive three-month translation adjustments of $1.9 billion, $937 million, and $445 million against revenues of $158.8 billion, $40.6 billion and $25.2 billion, respectively.

As a proportion of revenue, these positive translations came out to 1.2% for Amazon, 2.3% for Meta and 1.7% Tesla, respectively.

Compare this to fellow US tech companies that have extensive FX hedging programmes: Alphabet recorded a translation of 1.34% of revenue in the same quarter, while at Apple it was a loss representing 0.08% of revenues.

In the same quarter of 2023, this comparison resulted in translation losses for Amazon, Tesla and Meta of 0.97%, 1.56% and 1.23%, respectively. At Alphabet and Apple, they were losses of 1.52% and 0.47%, respectively.

The head of FX at another US large-cap company was surprised at how muted the impact of FX translations was on the non-hedging companies.

“As a data point, it’s an interesting statistic. I would be curious how peers evaluate it but to me it is a surprisingly low mark when put this way,” he says.

Looking at the average percentage impact of FX translations on earnings, between Q1 2020 and Q3 2024 they were all losses across the firms studied. Apple had the lowest with average losses of 0.12% of revenue, and did not have one quarter where it was higher than 1%.

Amazon, surprisingly, had the second lowest with 0.36%, followed by Tesla on 0.38%. Alphabet was fourth with 0.42%, and Meta much greater at 1.03%.

A few dollars more

So, for corporates of this size, is not hedging FX exposures a viable strategy?

Crédit Agricole’s Mallon says it’s possible for corporates to look at the currency risk on a portfolio basis and identify the extent to which exposures tend to cancel each other out.

“Firms could look for correlation between two different currencies that, when viewed in isolation, have significant risk. But when you look at them on a portfolio basis, you may have insignificant portfolio cashflow at risk,” he says.

“So, there’s certainly an element of being able to look to your exposures and decide not to hedge – or not hedge as much as the top line number might suggest.”

Many businesses are dollarised at the end of the day and some companies are happy to do that, as there is less FX risk

Francis Mallon, Crédit Agricole CIB

Mallon notes that some firms choose to rely on the belief that, in the long run, markets will revert to mean. But he makes sure to point out that this strategy is more valid when dealing with G10 currencies like the Canadian dollar, or those pegged to the dollar. Currencies in emerging markets and other markets with elevated variability, such as Argentina, Turkey and Russia, see little-to-no mean reversion.

Garth Appelt, head of derivatives, FX and emerging markets macro trading at Mizuho Americas, says the bigger firms get, so their war chests of cash become ever larger and similar to those of major money market firms.

“Because they have so much cash, their need to hedge the revenue they get from a particular country is less relevant to them. It’s not as much of a need,” he says.

Chatham Financial’s Dhargalkar adds that one of the main reasons a company might not hedge its exposures is due to offsetting revenues and expenses in a given currency. While there is some risk on the margin that is very real, as a percentage of overall business it might not be as great.

“They can be highly correlated or highly diversified, such that they offset one another,” he says. “Regionalising the supply chain is an excellent example.”

Mallon says that firms can also utilise dual-currency pricing in their contracts. A US firm establishing a contract in Poland, for example, could receive payment in local currency prices, establishing an exposure to Polish zloty. It can alternatively price the contract in US dollars and determine the cost of removing the FX risk without derivatives.

“Many businesses are dollarised at the end of the day and some companies are happy to do that, as there is less FX risk,” he adds.

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The European bank executive says that, if supported by local cashflow, having debt in foreign currencies can work as a strategy to organically reduce the amount of hedging required.

Barclays’ Rushton says firms can also choose to manufacture and distribute goods in the same currency – in other words, have costs and revenues denominated in the same currency – to reduce FX risk

“Some companies will look at regional pricing, particularly when goods are being distributed. If you think about where it’s manufactured and where it’s being distributed, trying to keep that local – especially in Europe – would be something that would work exceptionally well in reducing that FX risk,” she says.

She further notes that there is little FX hedging within the business services industry, as it tends to run on a very local model. In other words, firms look to bill and serve in the same currency and jurisdiction, so that ultimately the only FX risk is from dividends.

“If you’re running the operation and doing the billing, paying wages and everything else in that jurisdiction, it massively reduces the FX risk,” she adds. “And it keeps your pricing power competitive with the local environment.”

But the head of FX at a large US corporation says broadly that finding natural offsets can definitely work to reduce the need to hedge FX exposures, but it can’t work for everyone, especially those for whom the cost structure is largely in US dollars.

“We struggle with that at my firm because our cost base is almost entirely in dollars. We’re very heavily skewed to a revenue base that’s foreign currencies, but a cost base that is almost entirely in dollars, so there’s almost no effective natural offset,” he says.

He says it did investigate the idea and had numerous conversations with the treasury department but was held back by a limited cost base in euros. So, it determined that the lift to enhance its euro cost base as an offset against revenues would not have been worth the squeeze.

He notes, however, that as the proliferation of data centres rises, they tend to be located in emerging markets within Latin America and Europe, so there could eventually be more natural offsets available in future.

Editing by Lukas Becker and Louise Marshall