A few comments. Firstly, this week, emc is going up and down with the overall hi-tech market, which in a way is comforting. Unlike previous weeks, it is not being singled out for punishment. The ridiculous y2k nonsense is over, at least for now. The intel "threat" while still conceivable, is so far off that it probably will not affect emc this year. The lone problem hanging over emc remains its high p/e. I took a look at big charts which does plot historical p/e and it is very interesting. It clearly shows that since October '98 we are in perhaps the biggest bubble of all time. Amazingly, while emc, csco, dell, etc were growing like weeds throughout the 90's their p/e's remained quite low and reasonable. They simply were growing so fast that despite the constant price rise of their stocks their p/e's remained for the most part quite low. emc, for example, despite its mindbloggling stock appreciation, apparently traded at a p/e below 25 until 1997, and in 97 its peak p/e looks about 30. In 98 before the October crash its p/e rose to 50 its all time high. Since that crash, its p/e has continually risen (along with the rest of the bubble economy) till it peaked when emc hit 134 and its p/e rose above 80. It has now come back to around 63. Assuming emc can grow at 40% per year then a 50% premium to its growth rate for its dominance and the surety of its earnings outlook is perhaps justifiable and a 60 p/e may be maintainable, though it is interesting historically that it traded at less than half this p/e for the entire 90's up till now. Clearly emc was one of the great gems and bargains up till '98. The chart makes that quite clear. But emc is no longer a bargain since it has been "discovered" by the big boys. A year from now its previous earnings for the past 4 quarters will be about $2.16 which will only justify a price of 130 at a p/e of 60. I know I will be quite disappointed if that is the case. So I do think we are expecting the bubble to expand again to include emc (i.e. a higher p/e than 60) if we expect emc to rise above 130 before april 2000. What has happened in emc as in some many other stocks is that the next couple of years earnings growth was already priced into the stock. Look at csco for a case where it really has gotten completely out of hand. csco is pricing in probably the next 2 or 3 years of earnings already. In fact, csco is certainly one of, if not the most bubbly stock outside the internut group. Seeing csco's quite reasonable p/e ratio for the 90's and now seeing it here with its p/e having risen above 120 makes me think that if/when the bubble starts to deflate (which hasn't affected csco at all yet apparently) then csco is a much better choice for shorting or putting than emc. csco can and should at some point lose half its stock value (and it will then still be trading at a p/e over 60!). Likewise dell even now has a p/e over 70. Mr. Softie doesn't look nearly as bubbly, actually, and IMO will maintain its value better than the rest of the high-flyers. Orcl has a 30 p/e and lu has a 47 p/e, both decent bargains apparently.
In short, while we are not in the absurd csco category, nor even the overpriced dell level, we are not as cheap as lu and orcl. We are priced close to Mr. Softie, and that's perhaps fair. My last two points. The 50 percent p/e premium is due to the surety and safety of those earnings quarter after quarter year after year and in both msft and emc's cases I think that is a pretty good assumption. They both don't have a hell of a lot of serious competition at this junction. But if and when the bubble deflates and we go back to the p/e's of 97-Sept 98 (to say nothing of the bargain years of 90-96) then emc can lose 25% of its value from here (while csco should lose at least half its value). Finally emc will not double this year, unless the bubble completely gets out of hand, or its earning explode unbelievably. At this point we can't expect emc to growth faster than its p/e level of 60% per year. I can live with that because its earnings are such a sure thing, though clearly there are other stocks that will double or triple in one year worth searching for. |
