Nancy: I abandoned attempts to justify current valuations based on growth projections a year ago when the market ran past any level I might consider reasonable. FWIW (not much), if you assume MSFT can maintain an above-market 20-30% growth rate for 5 years (I prefer not to look farther out than that since even 1 year forward is complete guesswork), then they deserve a multiple of about 2 versus the market average, or around 50-60 P/E. That gets you $90-100/share (looking forward at $1.75), not great, eh?
The above considers that, at least for a while, the bottom-line growth can exceed top-line. KO managed this trick for many years in what is fundamentally a slow-growth business, and the market rewarded them handsomely (while it lasted).
Also worth considering is that MSFT is a software company and there are a lot of other possible avenues for growth besides the ones they now seem to be persuing. Look around at some other software companies with rich valuations, such as ARBA, and ask yourself, "Why can't MSFT get into that business?" Nothing save the will to do so, since there's no question they have top-drawer engineering talent and plenty of cash.
Here's an example: if the market's willing to believe there's a big upside for ebusiness software infrastructure and pre-fab app frameworks, well, who's the 800-pound gorilla of software? Unfortunately the king of shrink-wrap hasn't yet shown that they can build and sell this type of application. They have a bad habit of pushing their own proprietary standards, not building stuff that runs on platforms other than their own, etc., all of which would be limiting in this space. Oddly this is one reason why if they do get broken up the company might actually fare better long-run.
I'm sure you and others on this forum can think of lots of other possibilities. Historically MSFT's been excellent at execution but low on vision/innovation. Lately the execution hasn't been great, eh? But at least now they don't lack for vision (even if it comes from looking over the ramparts at what everyone else is doing!).
Cheers!
VG |
