Not to put a damper on the MSFT party... but a little math might give one pause.
MSFT today is worth about $500 billion. In the past 12 months, it has more than doubled.
Historically, MSFT has grown at approx 65% annually - yet in the last 12 months it has grown about 100%.
If it were to double again, then by early April 2000, MSFT would be worth 1 TRILLION dollars. One trillion. Stop, and think. The entire Gross Domestic Product in the US is less than 10 trillion.
I have heard the argument about population expanding etc. Well, not at 100% yearly.
MSFT's profit growth is not 100% yearly.
Quite clearly, MSFT's shares are appreciating relative to their business performance. Is this in anticipation that their future growth will catch up with the valuation? Hmmm....
I myself have been a proponent of valuing MSFT at a higher p/e, and according to different rules - where you pay more for certain very, very select group of companies not on fundamentals, but on "brand" considerations. You pay more for a brand - even though the content may be the same. No doubt, with it's near-monopoly status and "safe-haven" cache, and tremendous name recognition, it will be valued by investors around the world according to different rules.
Yet, please think about the math. It is one thing to say a stock can double every year, when the cap is reasonable. Say, you have $1... you can double it practically into the infinite future (in so far as this civilization is likely to last) on a yearly basis and not be troubled. But it is not the same thing to double from a much higher basis. Doubling from $100 billion - ONE FIFTH of MSFT's current market cap, would surpass MSFT's valuation (as of today), in less than 3 years. Think about this. Already how many companies are there that are worth more than $300 billion?
So, doubling is "no big deal" at lower cap levels. But it becomes extremely problematic the higher you go. MSFT at today's valuation will have to be worth $1 trillion in year 2000, in order to double.
You may say - big deal, trillion is just another number, like 1 billion and 100 billion - milestones which were easily surpassed.
This is simply not true. After 1 trillion, it would need to be at 2 trillion in year 2001, 4 trillion in 2002, 8 trillion in 2003, 16 trillion in 2004 - soon MSFT would be worth more than the entire US stock market. Assuming MSFT continues to appreciate at 100% yearly.
What is wrong with this picture? Well, there simply isn't enough money in existence in this world. Today, MSFT's market cap is greater than the entire worth of stock markets in several medium sized countries (such as Austria and Argentina) PUT TOGETHER. Companies like MSFT and GE are worth more than the entire Russell 2000.
Stop and think - even if all the money in all the stocks in the world went just into MSFT - soon there would not be enough money to keep doubling. This is not distant future - in less than 10 years, you would reach practical mathematical limits - and this assumes no money left over for not only any other stock, but any economic activity whatsoever - clearly absurd.
I'm not a doomsayer. Hell - I'm a rabid MSFT long. All I'm saying is, please realize that at these levels, you cannot expect MSFT to keep doubling yearly. At this point, there is a kind of momentum that's built into the stock. This momentum can come to an abrupt stop, once there is no more money available to go into it. Once that happens, MSFT will come down, not just stagnate. Why? Because the moment people realize that it's not growing as fast as other stocks, they'll bail - and that process feeds on itself... it goes lower, so more people bail. Until it goes too far, and eventually comes back to it's "true" valuation.
When will there be no more money available? That's the $1 trillion dollar question... One of the reasons why MSFT keeps going up is precisely because people are selling lesser stocks to finance more MSFT buying. This year, there has been a net outflow of funds from small cap Mutual Funds (redemptions). The Russell 2000 is down for the year. The divergences in the market between the stocks that rise and those that fall, is widening, and is at historic levels (a/d line). Short term, that will fuel MSFT as more money is available for MSFT (flowing away from other stocks). Yet there is a limit to that activity of re-allocation. Once and index such as Russell 2000 hits close to where many of it's stocks sit at or below book value - the outflow will stop (people will be able to buy the companies, and parcel them out for more). A divergence in the a/d line means that money is reallocated internally - away from one stock and into another. This could be broken if more money (fresh money) comes into the market. Yet, there is a limit to that as well. My point is that very soon, MSFT will not be able to count on MORE reallocation (the well will be dry), and will have to rely exclusively on fresh money. And then that well will run dry - even faster.
I am still long. My long-term portfolio has a bunch of MSFT, that I've had for years. I am not selling that - yet. But I'm not counting on the 100% yearly gains either. And I may sell. Not this year, perhaps. But within the next 2 years... I will have to look real hard at my mountain of MSFT. It has lifted me high - very high. I don't want it to bury me.
Again, I'm a MSFT bull. Just some idle thoughts on a tradeless Friday.
Morgan. |
