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

To: Ibexx who wrote (8783)	7/1/1998 1:43:00 PM
From: johnd	Respond to of 74651

Myth/Hope vs. Reality: ====================== NT 5.0 won't contribute a penny to MSFT bottom line in Fiscal 99, i.e. the one ending June 99. Office 2000 won't contribute to fiscal 99. Even if it did, it will be in 4Q and very small. (I am quite happy with Office 97 that I just bought in my company, why should I spend those IT dollars on Office upgrade? I better spend it on MIS for fixing my Y2K code problems. Only Windows 98 will contribute. But saying that Windows 98 sales figures match or slightly exceed Windows 95 sales is depressing. Windows 95 was 3 yrs ago and to have the same percentage effect on MSFT bottom line, the Windows 98 figures need to be 2x as much. In FY97 (ended June 97) MSFT reported 1.31 (2.63 prior to split). For FY98 (ending in June 98) MSFT will report 1.78. That is about 33% EPS growth. I think for FY99, MSFT will report about 33% to 40% EPS increase, at 40%, that would be about 2.52 (Note that my estimates are way higher than wall street consensus of 2.09 and even higher than the highest estimate of 2.25). So I expect that at 2.52 trailing reported EPS (not the deferred acrobatics EPS), MSFT will trade at about 50 PE or about 126 by July 99. That is one year from now and a 12% return from today. Forget all these acrobatics about deferred earnings and revenues. Forget about MSFT being able to grow 50% a year for the next 5 yrs. If it did, it will be a $115 Billion revenues company or 8x the size today. At its size today it is impossible to do because you need to grow staff, and other infrastructure at the same rate. So If I am all long, why am I so negative on MSFT stock valuation? I buy MSFT on periodically. Next buy will be when MSFT trades at less than 50 trailing PE. I expect I will get that chance in August. Why August? After the earnings release, it will be evident that at 20% EPS growth and 18% revenues growth, paying 65 PE for any stock is too lofty and the current exuberance will melt and as someone in this thread has said, "The AIR out of the stock price would be out". I expect the stock to hit 50 trailing PE some time between July 16th to October. That would be 50 * 1.78 or 89. Then I will buy more. For the year 98 (since Jan98), the stock is UP a whopping 70% (110/64.5) when the earnings increased only 14% (1.78/1.56) johnd