Microsoft is in a new industry, software for consumer applications.
In any mature industry, the PE is a good indication of stock value,
why ? Because one can predict very precisely the growth within the industry, as well as the growth of the players within the industry.
PE is ideal for companies like COKE, McDonalds, GM, Merck etc.
The stock price or market capitalization of a corporation is simply an indication of what the companies present value is, based on future earnings. Obviously if expected earnings are high the stock price will rise. There is nothing sacred about the ratio being 20 or 30 or 40 or even 100.
In emerging technologies there is no precedent to rate a company's
value, least of all by PE ratios. The best one can do is use economic models, one such model is the so called "S" curve. Given two data points one can predict how soon the technology will mature.
PCs have only penetrated 40% of homes in the US. So there is still a huge potential for growth for Microsoft.
If you add other areas like interactive TV, Settop boxes, PDAs, there seems to be no saturation point in the forseeable future.
Microsoft's growth will not be limited by the market dynamics, BUT by the Justice department if at all.
Thank you Dan, but I think I will hold on to my MSFT stock, until of course Alan Greenspan talks about "irrational exuberance". |
