How high will Microsoft fly? Message Board

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Technology Stocks : How high will Microsoft fly?

MSFT 478.53

-1.1%

3:59 PM EST

Public Reply Prvt Reply Mark as Last Read File

Previous 10 Next 10 Previous Next

To: Al Bearse who wrote ()	12/8/1999 7:23:00 PM
From: John Malloy	Read Replies (5) of 74651

What is Microsoft worth? How much can you afford to pay for it? You need to make two key forecasts to decide what Microsoft is worth. The first is how fast you expect Microsoft to grow in the future. Equity/share has grown 41 %/yr. for the past 11 years. Growth cannot stay that high forever. A realistic forecast must have growth gradually slowing as Microsoft approaches maturity. The second key forecast is the price/book ratio investors will pay for Microsoft. They currently pay an extremely high P/B of 15, well above P/B ratios of 2 to 3 typical of mature firms. As growth slows, investors will lower the P/B ratio they are willing to pay. You also need to forecast how the P/B ratio will fall. I have calculated what Microsoft is worth on my web site, analyticalbooks.com. I forecast that Microsoft's growth would gradually slow from 41 %/yr. today to 23 %/yr. in five years, and that the P/B ratio would gradually fall from 15 today to 6 in five years. Those forecasts make Microsoft's price grow to $190 in three years, then stay at that level as the drop in the P/B ratio offsets the growth in equity/share. After five years the P/B ratio stops falling and stabilizes. The stock price then grows again, but at a slower rate reflecting the slower growth of equity/share. What Microsoft is worth depends on how long you plan to hold it. Suppose an investor insists on an after-tax return of at least 12%. Microsoft's value to that investor grows and reaches a maximum of about $130/share at a three-year investment period, then falls off at longer investment periods. Given those forecasts, Microsoft is a buy because it is worth more than it costs. This result also means that "Buy-and-Hold" investing doesn't work. After three years Microsoft's value no longer increases; it falls off. You cannot follow "Buy-and-Hold" blindly. You have to keep reanalyzing the stock as new information becomes available and decide whether to hold on or to sell. This result does not apply just to Microsoft. It applies generally to all growth stocks that are growing rapidly now and selling at high P/B ratios. Specific results will vary from one stock to another depending on the shape of your growth and P/B forecasts, but there will be an optimum holding time, and "Buy-and-Hold" investing will not work. John Malloy

Report TOU Violation

Share This Post

Public Reply Prvt Reply Mark as Last Read File

Previous 10 Next 10 Previous Next