<< In a bear market, a company with 10% annual EPS growth might have a P/E of 5 or 6. >>
That's inaccurate, IMO. Maybe a small company in a non-growth or cyclical sector, with a limited history of earnings growth might have a PE in that range. But, the world's largest software company in a sector that certainly plays a huge and growing role in the future will not have a PE such as this. 20 is on the low end by historical standards for companies of this nature, IMO.
Does anyone have a site that might track the historical PE for large cap growth companies? What was the average PE of IBM throughout the mid to late 70s, much of which was a bear market?
<< If Microsoft could maintain their heady old 50% annual growth, in just 10 years their annual revenues would reach about $1 trillion. In 20 years, $76 trillion. >>
Nobody thinks they will continue to grow at 50% on a continuing basis for the next 20 years. Some might argue that spurts of 20% are possible, but that's not needed to make this a good investment. Let's go with a more reasonable rate of growth of 10%. In 20 years they'd have sales of $175 billion. They're in the software business which is and always will be a business of very high margins. In an average market, I'd argue that a software company with sales of $175 billion should have a market cap of more than $900 billion (3 times today's level). That's based on an average market resulting in a Price to Sales ratio of about 3/8 of today's P/S ratio for MSFT. If a bull market returns at some point between now and 20 years (rather likely), the P/S ratio could return to today's level, or theoretically the P/S ratio granted MSFT 10 months ago (more than twice today's ratio). This would result in a company worth between $2 and $5 trillion.
It could be argued that if MSFT can continue slow but steady, average growth of 10% that the stock price of MSFT would reach $400 in 20 years if the market rewarded them a P/S ratio similar to today. That would be a 600% gain from today's level. Invest in bonds at today's rates and you'd get a gain of about 1/2 that.
There are many arguments for a more bullish result than my example and an equal number of arguments for a less bullish result. My example is simply to show that 50% growth is not necessary for MSFT to be a good long term investment. 8% - 10% would most likely result in MSFT being a good investment, IMO.
Dave
Note: Inflation would have the effect of increasing the rate of growth in terms of today's $. |
