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Technology Stocks : How high will Microsoft fly?
MSFT 490.06+0.7%3:59 PM EST
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To: Reginald Middleton who wrote (8658)6/25/1998 11:02:00 AM
From: Wizard  Read Replies (2) of 74651
 
We are saying the same thing relative to MSFT. MSFT's value is at a premium (to book, earnings and every other metric) because investors (correctly) are paying up for a company that can reinvest at a high rate. Future book value is dependent on net income which is dependent on growth of sales and the profitability of these sales. Implicitly, investors are discounting a very high future book value.

I have not been arguing for using just earnings to value companies. However, by definition, P/E * E = stock price, nobody can argue with that. So although it is misleading to look at P/E's, all your analysis can still be summarized in P/E x E. Its just that most investors don't understand that P/E's need to be looked at in the context of everything you are talking about (reinvestment rates, capitalization v. expensing up front etc...). That is my point and that is why many (well a few anyway) Wall Street analysts do the work and then summarize the report with a discussion of P/E * E.

One thing you said that I don't understand is: "Discounting one year into the future is mathemetically futile, as nearly any academican will tell you."

It might be futile but that is what makes a market. Yahoo is clearly discounting a lot of the future. That is not to say investors will discount 5 more years of growth of book value.
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