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

To: JP Sullivan who wrote (19610)	4/2/1999 11:13:00 PM
From: Sir Francis Drake	Respond to of 74651

Winston and Harry Sharp, good points. One can do these calculations on paper, but obviously it's all a bit theoretical, and in practice things work somewhat differently. Yes, the market and world economy grows. That somewhat alleviates the issue of MSFT valuation, but does not solve it. The reason is that the valuation of MSFT grows MUCH faster than the valuation of the market (at approx. 25% yearly which is historically very high) recently, and the market in turn has been growing much faster than the US (or world) economy. A further wrinkle in this is that when you compute the growth of the market through, f.ex. the S&P 500, you are including in that calculation the growth of MSFT, which because of it's market cap is a very significant percentage of it (this is actually not a trivial effect - the most recent rise in the S&P was very largely due to just two stocks - MSFT and AOL!). Bottom line, whatever the growth of the market and the economy, MSFT so far outpaces it, that by the laws of mathematics, it soon would again reach mathematically unsustainable levels. The point about the mythical status of "valuation" - is a very good one. In reality, only the most recent stock purchases were made at that level, and therefore, one could say that only a certain percentage of the market cap of MSFT (or any stock) represents actual money laid out for the purchase of shares. For example, a large percentage of shares was purchased at MUCH lower valuation, and indeed, a certain percentage was essentially "free" (f.ex. Bill Gate's shares). However, it's not entirely that simple. The little old lady who purchased a large number of shares years ago, for just a few thousand dollars is today sitting on a relative fortune - yet she only laid out, say, 10K 15 years ago. Except for one thing - that 10K in turn has a "cost" - in the same way that, to take a more extreme example, 10K in 1909 was worth a HELL of a lot more than today. So, it's not really fair to call early purchases of stock at 10K, to be strictly speaking 10K put out. However, lets assume for the sake of argument that the actual money laid out for MSFT is a fraction of it's present day valuation. That only increases the danger and severity of a downdraft. If you don't actually have a pile of money behind all those shares, then it is impossible to redeem them all at the current price (the money isn't there). In case of a sell-off, there simply is no "support", and the descent would be extremely rapid. Even so, these considerations do have merit - without, however, seriously affecting the underlying thesis, IMO. The days of 100% yearly appreciation cannot continue indefinitely. I'm not saying that the growth will stagnate as of now. But looking over the next 2-3 years, I'm nervous. I was confident, and kept my shares of MSFT for many, many years. But I'm afraid the day will come when the laws of mathematics will collide with investor enthusiasm. The enthusiasm, however great, never wins over the laws of math. JMHO.