<I have a hard time understanding how these figures are derived, and your web page does not give me much help.>
<I assume you are treating what you call the "risk free rate" as some sort of discount rate and using it to arrive at the present value of future earnings. Am I correct? If so, how does one derive the correct risk free rate of return in the real world? Is it the long bond rate? If not, what is it?>
You're asking for an awful lot now Gerry :-) The next time you post a legal theory, I want a complete course on torts, equity and litigation. You asked me for my opinion and I gave it. Have you read the entire article in my site? There is an explanation for DCF in the site, but I admittedly forgot to post it, so I will include a link to it (here it is rcmfinancial.com. The risk free rate in the States is the treasury rate.
I honestly consider the analysis institutional strength. If one were to attempt to buy Gates's portion of MSFT, this is the exact method to be used by a bulge bracket firm ex. Merrill Lynch to value Gates's chunk (using at least what is in style for the '90's), not to mention that the analysis would cost you an awful lot of money (a lot more than value line). As I said before, I am not going to rehash the entire analysis, and I feel that most of your questions have been ansered already.
<I looked and I didn't see any discussion of Price Earnings ratios, just another one of your hard for us non-experts to understand spread sheets.>
Gerry, why don't you look at those "hard to understand spreadsheets" as hard as you look at Valueline, then you will find your answers. The P/E's were right where I said they were under the heading "Equity Value as Multiple of 1995 Earnings":
Low growth 6.45% risk free rate- 68.2 8.2% risk free rate 38.3 10 % risk free rate - 26.4
Moderate growth 6.45% fisk free rate - 116.7 8.2% risk free rate - 50.1 10% risk free rate - 31.6
<On the other hand, extrapolating Microsoft's past growth into the future is extremely risky. How is a company with a market cap of $90 billion supposed to grow for 40 percent a year? Personally, I just don't think it is going to happen.>
Gerry (not to say that MSFT can pull the feat off), remember that MSFT does not have to grow their market cap at 40% per year, that is your job as the investor. They have to grow earnings at that pace. Don't be so quick to directly link market capitalization to the ability to grow earnings. NSCP is a perfect example of this. It's market cap is absolutely ridiculous, but some investors are willing to support it and it does not effect its abiltiy to grow earings. Well actually, in NSCP's case it may affect it since they use their equity as currency in mergers and acquisitions, their equity will be devalued if their market cap is reduced. BTW, you are much better at numbers than most lawyers I know, and have a better grasp of technology than most of them as well (all of the lawyers in the New York area are still using Wordperfect 5.0 for DOS, is that what you use :-)? don't flame me, you know it is true)
<Companies like Corel and Oracle are (or will be shortly) eating into Microsoft's cash-cow Office Suite and back-end server businesses. In the OS market, NT is expected to be a barn burner.>
To be honest, I thought Corel and Lotus would be doing a better job as well, but alas I was wrong (browse throught the Corel Thread). Corel is going after extremely low margin business and MSFT is pushing out product above Corel's capability to quickly imitate (reference Office '97). As for Oracle, come on Gerry! Oracle was thier (the enterprise) before MSFT, if anything MSFT is taking Oracles share (RDBMS, SQL 6.5/7.0 and Back Office).
< NT could be big like Microsoft says it will be, or it could flop (i.e., disappoint inflated expectations), like Windows 95 did.>
Gerry, you are not lookng at the numbers, you are listening to the trade press. Windows 95 resulted in a record earings year for MSFT, and that is inclusive of the fact that they (Ernst & Young) significant defer earnings on OS revenue. A few more "flops" like Windows 95 and Gates will be a centibillionaire. Windows NT is on track to out do Windows 95 an a net earnings basis, the margins are much larger and the product was put together more efficiently (componentization allows for less man/hour waste).
<Microsoft's core OS and Office Suite markets are SATURATED. How many more people out there are going to buy Office Professional With Bookshelf?>
Everybody who wants to leverage their investment in MSFT productivity tools into the new information highway. MSFT realized a while back the impending life cycle of the suite market (they created it). Considerable new life will be injected into by turning Office into a high end, easy to use, component based development environment. Now the average power user can now send a full blown multimedia Excel application to his clients or managing director live through the internet instead of loading a spreadsheet on a file. The same can be said for the other suite products as well.
< To try to keep its industry leadership position in the age of the internet, Microsoft is spending hundreds of millions, if not billions, to develop software for the internet which it is GIVING AWAY.>
Gerry, you were wrong from the start with this one, and several people have pointed it out to you. What MSFT is doing is creating demand for their core products. Is it working? Look at how fast demand is ramping up for Windows NT server, Windows 95, Front Page etc. This shouldn't be so hard to understand, Lotus and NSCP are doing the same thing, and succeeding.
<Microsoft's internet strategy ISN'T WORKING. For example, in browsers, in spite of the fact Microsoft
gives theirs away, Netscape still dominates. While Microsoft spends billions to develop software it gives
away, Netscape SELLS its browsers and servers in the corporate intranet market and dominates that
market. Even in the public internet space, Microsoft does not lead, let alone control, standards; as Ballmer
admitted in his recent News.com interview, Microsoft still has to "embrace" standards developed elsewhere.
They have not gotten to the "extend" part yet.>
I'm not even goin gto bother to reply to this one, it has been answered too often in the past........... OK, I'll say just a little :-), Nah, no need to sound repetitive.
< In the home entertainment/on-line services field, Microsoft is losing hundreds of millions a year to establish
its brand franchise. I agree that these should eventually pay off, even give Bill Gates his goal of a recurring
income stream, but how soon and how big will the payoff be? What are the risks? Of more immediate
concern, how do they sustain the 40 percent per annum earnings growth needed to justify their current stock
price with a billion dollar black hole like MSN to deal with?>
Gerry you exagerate to no end. Do you remember when I explained that MSFT's interest on thier bank accounts "alone" throw off enough money to cover your so called "black holes"? MSN is not a billion dollar sink hole, they made a multimillion dollar mistake. |
