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To: Joan Osland Graffius who wrote (10650)	12/9/1997 9:50:00 PM
From: Bonnie Bear	Read Replies (1) \| Respond to of 18056

Joan: I agree with you on software (have said this in previous posts). Oh the other hand, the market discounts software companies more severely when they become out of favor , the market carries a much lower valuation of a software company that isn't fashionable, even though its innate capacity to produce software, its "book value", may be quite high. Look at novell, apple, corel, borland. Count number of highly paid competent engineers, replacement and training costs of engineers, cost of computers and buildings, ability to produce software, etc. In a bear market the software stocks will suffer the most. Could this be the extrema of the bull market: the double bottom (maybe) in apple coinciding with the double top in microsoft?

To: Joan Osland Graffius who wrote (10650)	12/10/1997 2:56:00 PM
From: Bilow	Read Replies (2) \| Respond to of 18056

Regarding book value of software companies... (1) The real asset of the company is in the engineers, and, for more than 100 years in the US, it has been impossible to prevent them from working for someone else. In other words, that part of the book value is an asset that the company has no legal claim to. (2) Software declines in value just about as fast as hardware does. Go into any discount software store and you will find huge amounts of last year's software for sale at 75% off. Old software is cheaper on CD than old music. The reason for this is that once written, software is incredibly cheap to reproduce. The implication of this is that when the computer/software industry stabilizes, sales at software companies will fall through the floor, even while unit sales continue to rise (but slower). The industry is giving the first hints that this will happen (look for declines in average system prices), over the next 5 years or so. Given the incredibly high PEs of even the long time profitable software market leaders, it is possible that they are hugely over-valued. For example, given a PE of 40, and P/S of 10, if earnings drop to 8% of sales, and sales increase at 8% per year, giving a PE that drops to 8, the stock price loses about 93.6% of its price. I.e. MSFT in single digits. Of course, that example assumes an instantaneous transition, but someday, just like the auto stocks, the software industry will be a low-growth industry. -- Carl