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

To: Ann Corrigan who wrote (5174)	2/19/1998 1:12:00 PM
From: Ed Schultz	Read Replies (2) \| Respond to of 74651

I just got back from a talk given by Mike Kwatinetz, Financial Analyst at Deutsche Morgan Grenfell. He is known as the premier analyst for hardware and in the top 2 or 3 in software. He gave some interesting insights into Microsoft. In particular I liked his discussion on the valuation of Microsoft. To summarize, in my own words, a lot of people are missing the overall picture when it comes to the growth and valuation of Microsoft. In particular, Microsoft has a certain amount of deferred (unearned) income which is set aside each quarter. This amount is not reflected in the earnings and hence does not reflect the true growth rate of Microsoft. Furthermore, this deferred account is growing much more rapidly than Microsoft itself. The example he gave was as follows. Let's assume that in the first year you have $100 of income with nothing deferred. The second year you have $150 of income with 20% ($30) counted as deferred. So you report to the street that your income is $120. So now the question is, did your company grow at 20% or 50%? In the past year, Office 97 has started to create a deferred income stream which the Office products never have in the past. Hence, not only is the company growing by about 35% per year (due in large part to Office) but its deferred stream is growing at a much more rapid pace because of new income from Office97. Hence, this is potentially the reason why Microsoft has such a high PE and deservedly so. All the above is just my interpretation of the talk.