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

To: Bearded One who wrote (11774)	10/25/1998 1:59:00 PM
From: Miguel Octavio	Read Replies (1) \| Respond to of 74651

What is Microsoft's true P/E? Answer: 50.8 The way I understand it Microsoft uses a very conservative approach to accounting, they pro rate revenues over the next eighth quarters. In this way, the company smoothes revenues and avoids peaks associated to new products being released. Thus, the reported P/E is not the same as the true P/E, because revenues are registered in the future even if the sales occurred in the current quarter. If one calculates today's trailing P/E one gets 62.6. The question is what is the true P/E? I modeled this by looking at reported revenues. Reported revenues grow quarter to quarter by approximately 6.5%. So I went back to September 1997 and went back eight quarters earlier and asked if true revenues also grow 6.5% quarter to quarter, what would have been the true revenues required to obtain the reported revenues in Sept. 1997? By adjusting the first value, and assuming 6.5% growth, I could match the reported revenues of Sept 1997. I then projected that all the way to the year 2000, and found that up to July 1998 it matched the numbers reported by the company quite well. I then calculated revenues per share and assumed the ratio revenues per share to earnings per share stays constant quarter to quarter. The result was that the current P/E is 50.8. Remarkably enough, I did this in July and the number for earnings per share matched quite well the number reported in September (I got 57 cents, the analysts had 49). If one projects into the future, I get that at today's price MSFT will close 1998 with a P/E of 47.7, will close 1999 with a P/E of 37.1 and the year 2000 with a P/E of 28. (These are all "true" P/E's ). If anyone wants to have the details, send me a private message with your e-mail and I can send you an excel spreadsheet with the model. Miguel Octavio