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

To: Reginald Middleton who wrote (12873)	12/2/1998 12:24:00 PM
From: johnd	Read Replies (2) \| Respond to of 74651

Reginald, So let us engage on this discussion a bit. * Let us say MSFT has 100% gross margin. * Let us assume opearintg margin is also 100% (i.e. ignore R&D, M&A) * Let us factor in all the deferred revenues * Let us use use the 35% tax bracket. 12/2/1997 12/2/1998 12 month revenues 12.9 15.4 Billion def. revenues in balance sheet 1.9 3.3 Billion Incremental 12 month def rev. 1.4 Billion 12 month reve with incremental 16.8 (15.4 + 1.4) def revenues Revenues growth (16.8-12.9)/12.9 * 100 => 30% Microsoft will eventually reach operating efficiency to the point where even if net profit margins were 65% (Revenues = Op. Profits less taxes), that profit cannot grow more than 30%. Of course I understand that if MSFT were at 65% net margin, the profits would be about 10.9 Billion or about $4.00 EPS. $4.00 EPS * 30 PE = 120. So let us increase the PEG from 1.0 to 1.1 => 132. One can use whatever PEG one wants. So what is the economic earning growth?; Well right now what I care the most about the "real revenues growth" The real revenues growth is about 30%. Theoretical max trailing EPS now, is $4.00. Reginald, having seen your posts for 2 years, I see the following pattern. When the stock trades at good values like back in Aug, Sept, October when the stock hit 88 you hardly post. But when MSFT stock gets into richer valuations, and there is strong evidance of upward momentum, I see more and more of your postings. I know this is a good way to pull in momentum players into your website. That is good. (By the way I liked your web page). I would like it if you could play it at a fair level. Nevertheless, I respect everything you say and you make a lot of good points. You are just adding fuel to the fire of overvaluations. You might wonder why I say these. The vested interest is that as I get more and more cash coming in, I put in money into the stock I like. Periodic investments hurt when the purchaces are at rich valuations. For example the purchace made in July 15th for 118, took till late November to breakeven and my investment at 118 was down to 88 at one point. I am happy it is at 128 now or I am up about 8%. But MSFT was very overvalued at 118 in July 98. We all should be worried about MSFT now representing 3% of all of US stock valuations i.e. 325 Billion out of total of 11 trillion. For the stock to double i 2 years, it probably has to represent about 5% of total equity valuations. Despite short term movements due momentum investors and the standard fear and greed phenomenon, I have come to realize that MSFT has full control of its stock market price. Knowing that currently the put warrants are at 80 - 88 and that most recent buybacks happened at about $100, the current 130 price is a bit too rich. I am just telling my observations, because sometime in 1999, MSFT will hit 50 PE and the stock will be at 125 even if it surpasses 130, 140, 150 in the shorter term. johnd