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

To: Charles Tutt who wrote (48818)	8/28/2000 12:20:48 PM
From: johnd	Respond to of 74651

From the Bull market report -- 4. MICROSOFT STARTS "INCH-UP" PROCESS Just so you know, Microsoft (MSFT, $71, up 1) seems to be starting its "inch-up" process again. What do we mean? The stock dropped like a rock in the 2nd quarter, made a base in the 60's, rallied to the 80's and then faltered just recently, falling back to $70 in late July. We have been saying for months now that Microsoft is undervalued. We'll say it again. Microsoft is undervalued. If you don't have 1000 shares, now is the time to start accumulating shares to help you reach that goal. Why do we feel this way? The lawsuit is a non-event. Whether they remain as one company (which we believe will happen) or whether they break them up in to two firms, the stockholder will be the winner. They are a cash machine. They are composed of smart people. They have great products. They have a monopoly. And their PE is only 41. Let's put that in perspective. For decades stocks have sold for a PE of their growth rate. So if a stock was growing 10% a year, it had a PE of 10. In the last few years, this has increased to a multiple of 2 to 3 times the growth rate. General Electric (GE, $56, unch.) is growing at 16-18% per year and is trading at 49 times earnings! That's 3 times its growth rate. Now, Microsoft is growing about 25% per year with a PE of 41. It should have a PE of between 50 and 75. [An interesting thought: With GE and Microsoft trading a similar PE's, which would you rather own?] So Microsoft's PE is quite low compared to the rest of the market. It is our opinion that it should be trading at the higher end of the valuation scale because of the huge successes they have had, the $24 billion in cash that they have, the $16 billion in investments in other firms that they have, and their 40% after-tax profitability rate. So we feel that it is only at matter of time before Wall Street places the proper value on this great company.