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

To: John F. Dowd who wrote (22757)	5/16/1999 5:12:00 PM
From: Sir Francis Drake	Read Replies (2) \| Respond to of 74651

JFD - nice list. Let me play devil's advocate. 1.<<Industry leader in one of the fastest growing sectors of hi-tech.>> What if that company is valued on that basis - i.e., it has all this priced into its shares. But now the company is leadership is under assault - Linux, etc, etc, etc, and it is BEHIND the curve on an area that seems to be the leading edge: internet. So, the shareprice that reflects complete dominance of 1996-1997 proportions, will need to adjust to the reality of 1999 - forward of diminishing industry leadership. <<2.Revs. and earnings that seem to climb like the Eveready Bunny(excuse me Federal District Court)>> Slowing. <<3.One of the most cash rich companies in the world.>> Spending it FAST. See recent comm deals. Not certain deals will pay off. <<4.Great Balance Sheet>> Hard to argue. Question: can it be maintained into the future, as the cash position diminishes. <<5.Outstanding management.>> Hard to argue. Question: are they flexible enough to roll with the punches? They did have management structure problems, which Ballmer recently addressed with his Vision 2 reorg. But it is not clear they will succeed to overcome their problems. After all, if they were so perfect, they wouldn't have had the problem in the first place. <<6. One of the largest capitalizations of all traded companies (therefore appealing to institutional investors).>> Large capitalization is good up to a point. MSFT is far beyond that point. If you are simply interested in institutional investors, then as soon as you passed the treshold in market cap for institutional investors to come in, any GREATER cap goes against you: it is harder to maintain growth momentum and shareprice appreciation. I've argued this point repeatedly. At this point, MSFT being the largest cap company out there is at a huge disadvatage from that point of view. <<7.A company so strong that the competition has enlisted the US gov't. to stop it.>> Bad. Once you reach that size, it invites govmt. scrutiny, micromanagement, meddling, deep-pocket greed, policy posturing etc. That's never good. You are definitely held to a higher standard, and it's never good to be under govmt. scrutiny. <<8.Profit margins that are the envy of the business world.>> Hard to argue. But, if indeed computing is moving more toward the web, then what MSFT has come up with thus far (CE etc.), has LOWER margins. All in all, how likely is it that MSFT will be able to maintain profit margins across their entire revenue stream? In order to survive and grow, MSFT will have to enter new markets. Most likely, they will not offer the same margins as the near monopoly products MSFT has enjoyed thus far. Even today, all products outside of its core O/S and related app ware, sport far lower margins (just take a look at the whole internet division of MSFT). In time, the percentage of business derived from the lower margin products will grow, leading to the flattening of the margin. Almost inevitable. <<9. A company with enormous insider ownership.>> Mixed blessing. At this point, MSFT insiders have such wealth, and such diversified assets, that the incentive to keep so much of it locked up in MSFT shares is small. Even if B.G sold off ALL his shares, he'll never go hungry... he's diversified long since. So, as MSFT growth slows in percentage terms, the incentive to hold on to the shares is ever smaller. Now that mountain of shares is a threat, in so far as it will increasingly be unleashed on the market. This could be seen as a net negative. <<10. A leader that has more perseverance than Calvin Coolidge would have demanded.>> Hard to argue. As long as perserverance doesn't translate into the kind of bull-headedness that could prove costly vis a vis the DOJ. Anyway, I'm not saying your points are not valid, just wanted to stir up a bit of trouble :) Morgan