"You assumption for a 26% average growth for msft is very difficult to accept"
You are generalizing, the 26% number is not quite an average, and it is growth in revenues. If you noticed, net income actually shrinks over time due to my perception that barriers to entry shall be reduced significantly in the near future forcing MSFT to increase R&D and overhead (reference NSCP and Corel).
" You almost kept the cost and expenses constant for the next 10 years and this is hard to accept too"
As an efficiently managed company grows larger costs and expenses reduce in proportion to revenues as a result of economies of scale - thus cost of revenues decrease, but sales and marketing as well as R&D increase due to the reasons mentioned above. Therefore although revenue increases are steady, EBITDA and net available to common gradually decrease. The numbers that occur after four years are RELATIVELY irrelevant, due to the dynamic nature of the industry and the fact that the DCF valuation matrix is set for only three years. They are inputs yes, but they are guesswork as well.
"When a company is getting too big, it will be very difficult to keep 26% growth. Msft will have difficulty in keeping a 15% growth when its revenue reaches $30B, which it will reach very soon according to your projection. "
You are generalizing again. What is "too big?" In order for that statement to be true, you must qualify it as:
1.) a function of potential market(s) size,
2.) competition,
3.) and efficiency of management.
MSFT has actually grown faster at several instances as they have gotten larger do to the fact that they have accessed certain new markets. There are MANY NEW software sectors that they are going after (namely the enterprise - which have the largest margins in the industry, online and electronic gaming, persnal appliances and new media) all of which MSFT practically had no real penetration until very, very recently yet they are presently growing at a faster rate than all of thier competitors. These are potentially all new cash cows.
You must also consider the new globalization of commerce afforded by the present adminsitration that allows MSFT access to the largest markets in the world, the Asian markets. On top of all of this is the fact that the computer software industry is still a nascent industry. I know it is hard to think of in those terms for people who are computer literate and use the technology on daily basis, but less than 35% of the US population currently have computers, and the US is the most computer literate nation in the global market. Computer ownership is currently growing at a pace of over 25% per year in the US (and the other nations may eclipse that pace, I don't have the data) and associated device (ex. setop boxes and devices which will use light OSs such coomon household appliances) will most likely eclipse that. MSFT has, by far positioned themselves as the dominant and most likely company to supply the OS for these machines and most liekly more than one application to run on these deveices (currently, most computers run several MSFT applications and the MSFT OS). We must not make the mistake of considering the technolpoy industry. software especially, to be anything but in the rapid growth stage.
"Also I don't know why nscp has only three years valuations in your model."
Both MSFT and NSCP have 3 year valuations in the DCF matrix. The models are the same, only the numbers are different.
"Also I think market is efficient, even for the story stocks."
If the market is efficient, then how do individuals such as George Soros and Warren Buffet consistently beat the benchmark numbers. Go back and read the efficient market theory, look at the historical returns of the investors mentioned as compared to the markets various benchmarks over time, and compare the theories precepts to the reality at hand. The efficient market theory is virtually impossible to prove when several individuals consistently outperforms the benchmarks over the longer horizons.
As Sal mentioned earlier, there are many. many safer companies to be bearsish on other than MSFT. |
