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Technology Stocks : How high will Microsoft fly? -- Ignore unavailable to you. Want to Upgrade?

To: johnd who wrote (42828)	4/21/2000 3:45:00 PM
From: Valley Girl	Read Replies (2) \| Respond to of 74651

Exactly the point of my post 42808, except I didn't have the courage to name any names. The market's overvalued, but if the "average" S&P stock is worth a 30 P/E for the average growth rate of about 12%, then MSFT's 20% growth (real, top-line-driven growth) is worth 40 P/E. If the market were to revalue all these stocks back to historic P/Es (taking the S&P back to at least 20 P/E), then 20% growth would be worth only about 25 P/E, but the corresponding effect on other stocks would be much worse. Here's a rough P/E versus growth chart I made up a few months ago to aid my shopping: Growth P/E P/E P/E Rate 5-year 10-year Market 5% 11 9 18 10% 14 14 24 15% 18 22 30 20% 22 33 38 25% 27 50 46 30% 32 55 35% 39 67 40% 47 80 45% 56 96 50% 66 113 The 14 P/E for 10% growth is taken as the baseline. All other P/Es are relative to that. You can run the calculation for 5 years of compounding or, if you think the growth is sustainable for longer, 10 years, and come up with the numbers in the first two columns. The third column shows where we are in the current market environment, which appears to be willing to pay 25-30 times earnings for relatively average companies. The numbers in that column are compounded for 5 years, and are therefore comparable with the first column. (5 years in this game might as well be the end of time because by then the game will surely have changed.) So relative to the market, softee lands in the 38-46 range, or about where it is now. If you dare, take the projected 5 year growth figures for your favourite stocks and compare them to the "market" column. Or, double-dare, to the first column of historic P/Es - gasp! Read Fleckenstein's Contrarian column some time, it's an eye-opener.