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

To: Dave who wrote (53759)	12/3/2000 8:55:15 PM
From: David Howe	Respond to of 74651

<< As you probably know, for a particular company, historical P/E is approximately equal to annual earnings growth, so a company with 10% annual growth can be expected to have a P/E of about 10 >> That's total bunk. That's a rule of thumb that is used frequently for valuing companies with high growth rates, but it has nothing to do with valuing MSFT. Sure, it has been argued that a company growing at 200% might be fairly valued with a PE of 200. That's a metric that has been used during this bull market, but it's not even remotely usable in valuing MSFT. Coca Cola (KO) has a PE of 80 and it has NO growth. Several years have passed since they've grown even a few %. Yet, it still has a PE of 80. It's a mature company with a steady reliable market. I'm not saying that MSFT should be valued like KO, but I am saying that your idea of 10% growth equating to a PE of 10 is not worth the time it took me to type this response. GE has a PE of 42 and it has growth of about 10%. GE is not one of the high flying tech stocks that got caught up in a high level of speculation. Maybe GE is setting up for a fall in this bear market we may be in, but I'll bet that the lowest PE GE ever ends up with is 20, even in the depth of a bear market. GE is too solid and diverse a company to go lower than that, even if their earnings growth slows to a halt, IMO. 10% growth does not equate to a PE of 10. Dave

To: Dave who wrote (53759)	12/3/2000 9:16:29 PM
From: David Howe	Read Replies (1) \| Respond to of 74651

<< Buy GM (earnings growth 12.3%, P/E 5.5) or WBB (earnings growth 21.63%, P/E 6). >> Those aren't valid comparisons by any measure. GM is in a cyclical industry. Sure, they grew EPS by 12% this year, but the prior year, their EPS fell by 50%. Most would agree that manufacturing autos is a highly competitive, low margin, cyclical business. Hardly the same thing as the software industry. Especially considering MSFT is the out and out leader and has very little competition in a number of their key areas. WBB (old folks homes) has only moderate revenue growth and they seem to be growing EPS by cutting costs. That's not a business that inspires a lot of faith. Cut costs, the properties go down hill, the customer base starts to fall off and new ones don't like the run down facilities. This business could deteriorate quickly. It is also a highly competitive business. Practically anyone can build a few condos and call them a retirement community. No wonder they have such a low PE. It's a small company in a very risky business. Dave PS. Connors said that they feel the software industry is THE place to be right now and for the next "25 years". This is the age of software, and it's just beginning, IMO.