Regarding book value of software companies...
(1) The real asset of the company is in the engineers, and, for more
than 100 years in the US, it has been impossible to prevent them
from working for someone else. In other words, that part of the
book value is an asset that the company has no legal claim to.
(2) Software declines in value just about as fast as hardware does.
Go into any discount software store and you will find huge amounts
of last year's software for sale at 75% off. Old software is cheaper
on CD than old music. The reason for this is that once written,
software is incredibly cheap to reproduce. The implication of this
is that when the computer/software industry stabilizes, sales at
software companies will fall through the floor, even while unit sales
continue to rise (but slower). The industry is giving the first hints
that this will happen (look for declines in average system prices),
over the next 5 years or so. Given the incredibly high PEs of
even the long time profitable software market leaders, it is possible
that they are hugely over-valued. For example, given a PE of
40, and P/S of 10, if earnings drop to 8% of sales, and sales
increase at 8% per year, giving a PE that drops to 8, the stock
price loses about 93.6% of its price. I.e. MSFT in single digits.
Of course, that example assumes an instantaneous transition,
but someday, just like the auto stocks, the software industry
will be a low-growth industry.
-- Carl |
