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

To: Reginald Middleton who wrote (8658)	6/25/1998 11:02:00 AM
From: Wizard	Read Replies (2) \| Respond to of 74651

We are saying the same thing relative to MSFT. MSFT's value is at a premium (to book, earnings and every other metric) because investors (correctly) are paying up for a company that can reinvest at a high rate. Future book value is dependent on net income which is dependent on growth of sales and the profitability of these sales. Implicitly, investors are discounting a very high future book value. I have not been arguing for using just earnings to value companies. However, by definition, P/E * E = stock price, nobody can argue with that. So although it is misleading to look at P/E's, all your analysis can still be summarized in P/E x E. Its just that most investors don't understand that P/E's need to be looked at in the context of everything you are talking about (reinvestment rates, capitalization v. expensing up front etc...). That is my point and that is why many (well a few anyway) Wall Street analysts do the work and then summarize the report with a discussion of P/E * E. One thing you said that I don't understand is: "Discounting one year into the future is mathemetically futile, as nearly any academican will tell you." It might be futile but that is what makes a market. Yahoo is clearly discounting a lot of the future. That is not to say investors will discount 5 more years of growth of book value.

To: Reginald Middleton who wrote (8658)	6/25/1998 3:58:00 PM
From: johnd	Read Replies (3) \| Respond to of 74651

Reginald, Ibexx: The "E" part: Take the latest earnings report (with balance sheet) of MSFT from April 98 and April 97. You can see that the difference in deferred revenues were about 1 Billion. In defence of you fairly valued argument, let us assume that all of that 1 Billion would have contributed to earnings before taxes if not deferred. MSFT has a 35% tax rate, so about 650 Million would have been added to the EPS bottom line. 650million out of 2.7 Billion (fully diluted) is about 24c addition EPS. So take the last 12 months reported EPS (before Web TV) charges) of 1.68 and add the .24 to it. That gives me 1.92 So divide 105 by 1.92, I get 55.26 (Actual PE). Note that these above is very optimistic because it assumed not proportional expense taken out for COGS, SGA and R&D out of the 1 Billion. So believe the real PE at this point if no revenues were defered would be somewhere between 55.26 and 67. Isn't that a bit too much for a company with revenues growth of 18% - 25%.? Give some premium for market monopoly, good management. May be I will give 45PE, (even that is higher than Coke (whose market control, performance is more predictable) 1.92 * 45 gives me 86.4. The other thing you have to consider is at these valuations, Microsoft is not buying back it's own stock. I am sure they bought a lot back in the low 80s a few days back. But they won't buy back until we get to high 80s or low 90s again. There is too much of excessive exuberance. In day few days the Windows 98 intro hype will calm down and reality of possible realistic growth rates would set in and the stock price would pull back to low 90s. johnd