As I admitted in my earlier thread MSFT may suffer from short term fluctuations, but my general consensus is up. In my earlier thread, I was advising the investor who bought in at 60 to remain. There may be a short term correction (actually there already has been, but MSFT was relatively unscathed) .There are several fundamental reasons for the higher valuation. The potential for a signicantly larger new market (internet programmers and commerce - MSFT is the only other significant player outside of NSCP & Sun, intranets & servers, markets opened up by GATT, significant crackdown on international software piracy - China alone is worth many, many million to the bottom line - several new product releases). MSFT is soon to release thier NT 4.0 product which is thier most significant OS to date, and will most likely allow them to entrench themselves firmly into Unix territory for good (they are already consuming Wall Street back-end office networks - a Unix mainstay, as well as high end graphics). If some sigificant bad news arrives between now and then MSFT bears can party, but if not, then times may not be as happy (hence my comment on the possibility of short term fluctuations). The NT 4.0 product is solid, and MSFT has doubled thier R&D budget and went on an acqusition binge. If this stock somehow (which I doubt, manages to correct 30-40%, it will be extremely temporary, for institutions with real research power foresee the immense oppurtunity (albeit competitive) Microsoft has before it. Compare the valuation of Netscape @ a P/E of 628.1 and a beta of 2.1 (and that's after a tech sector correction) to MSFT's at 36.47 with a beta of .96. Obviously Netscape's astronomical valuation is based much more on the speculative potential of the new networking market than on trailing earnings and revenue. We must attribute some of the same valuation principles to MSFT, albeit on a considerably more conservative plain. MSFT, in my opinon will eclipse Netscape in the browser/server battle.
The following is an excerpt of my post from another thread concerning the MSFT's strategy in market share battles.
I think the question is which company will control the developer hearts. Browsers are not a high revenue business. Most of Netscape’s revenues come from server software and intranet consulting. Microsoft is strategically attempting to strangle Netscape.
Let's recall how Microsoft obtained the word-processing market. WordPerfect had dominant market share (controlled word-processing), Bill Gates wanted dominant market share. Bill gates calculated exactly how much market share WordPerfect would have to lose before cash flows would be insufficient to support current servicing and marketing expenses. That cutoff point was 5% of market share. Gates & Co. simply acquired 5% of market share through very aggressive promotion and marketing (albeit at a temporary loss and with a very good product). With the advent of the 5% market share loss, WordPerfect’s customer support, servicing and R&D went down the tubes, Quickly replaced by MSFT.
We must assume that the people at Netscape have studied and analyzed Bill Gates carnivorous business techniques, but that does not necessarily mean they can successfully defend against them. Netscape plans to take control of the internet by having the de facto standard browser, consequently supporting their de facto standard browser features which would be embedded in their server software (for which you have to pay good money). This is why they are willing to give the browser away (although they do garner some revenue by selling browser licenses). Microsoft sees this strategy clearly, although a little late, but not too late. The majority of computer user who browse the web do so on Microsoft's OS. This gives Microsoft a fundamental strategic and technical advantage. Netscape sees this as well, which is why they (along with there hardware/Java partners at Sun and Javasoft) are trying to replace the de facto standard OS with an all encompassing browser which acts like an OS and a programming language which is portable and platform independent (a no-no for MSFT, which thrives on being the de facto standard platform).
Now, back to the B. gates WordPerfect strategy. Bill G. is at a quandary, What does it take to stop Netscape & Co. dead in their tracks. Enter the Carnivorous method of doing business which has aided Microsoft so well:
1.) Cut off the main revenue of the competition. Netscape makes most of its money from servers - MSFT gives very capable servers for free.
2.) Eliminate the strategic advantage of the competition - Netscape benefits from dominant market share in browsers and the ability to set browser/server features and standards. MSFT has:
a.) finally created a better, faster browser with more features (reference IE 3.0 beta),
b.) forced Netscape for the first time in it's history to incorporate standards introduced by another company into its browser (reference navigator 3.0 beta 5 - font technology for the web and borderless frames)
c.)Microsoft plans to eliminate the browser market altogether by incorporating it into Windows OS. This will deal a significant blow to Netscape by making it very improbable, if not impossible for them to set standards or maintain dominant market share. Most of the world uses Windows on their PC's and a growing number are using it on their workstations (reference the upcoming release of NT 4.0). How many people or corporations would make the effort to purchase or even obtain for free a separate browser when the Os incorporates the same or possibly more features. And I doubt that Netscape could outdo Microsoft in integrating the browser into the OS (it would go against their cross platform credo).
d.)Netscape had the jump on developing a simple to use authoring system through Navigator Gold and the Live Wire high end authoring package. Microsoft totally side swiped Navigator Gold by purchasing Vermeer Technologies, which makes Front Page. Front page is the best HTML authoring packages presently available. Microsoft's answer to the high end authoring and multimedia package (Internet Studio) is yet to be released, even in a beta form. I am inclined to believe that this will be a killer application. Microsoft has acquired or purchased licenses from no less than five companies to bolster their technology for this product, and to my recollection, no alpha/beta program has garnered nearly this much time nor resources, except for MSFT's Windows 95 release.
d&1/2.) Sun appears to have created what very well may be the de facto programming language for the net, and Netscape has partnered with Sun to take full advantage of it, to the detriment of Microsoft. Microsoft says if you can’t beat them, do better than them. Instead of going head on in a development war, MSFT has embraced Java, and created development environments which they say are superior to Sun's, and Microsoft appears to have very prominent company in this opinion.
Now we get to the Active X technology. Active X, which is a funny name for OLE/OCX, are the building blocks for Microsoft Office's connectivity and file sharing/cooperation. It is also an indigent part of Windows 95 through OLE 2.0. This means that MSFT has the worlds largest installed user and development base for potential internet programming, regardless of the quality of Active X technology. Even worse for Netscape and Sun, Active X does many things that would be difficult for Java, while simultaneously allowing Java to become an Active X control to manipulate or call other apps and Active X routines. Java, at this time cannot say the same. Java has many unique and promising capabilites, but one thing it does not have is an installed user base of over 20 million users. Java and Active X do not do exactly the same thing, but if the Active X technology is implemented correctly from a technical point of view using the carnivorous technique, it will do more than Java on the Web.
Reginald C. Middleton
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