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No. of Recommendations: 11
Late 90s were nuts - a bunch of .com promise land stocks that didn't even have a solid business plan were driving the market. I remember my b school schoolmates making 30% a day buying stocks premarket that were upgraded that morning and selling them at huge profits later in the day.

But it wasn't just those loony stocks. There were some very solid companies like Microsoft that were in the same position as many of our companies today. They were relatively new, growing very fast (30-40s instead of 50-80s for our companies today), dominating their respective fields with gross profit margins in the 80s to 90s and stock trading in the high 20s P/S (vs 30-50 for our companies). Mind you, interest rates were in the 5-6% range. At those rates, P/S should be higher.

There was one big difference, though, between Microsoft back then and our companies today. Their business was not recurring with the same level of predictability as our companies. Back then, people would buy one install of MS Windows or Office and it lasted them for many years to come. All of Microsoft's revenue came from new users and new PC and server sales that needed Microsoft operating system plus SOME software upgrades to new version of their software that had generally pretty long cycles. When the market tanked, sales of all kinds of tech cratered. Less .com startups meant less servers and PCs with Microsoft software. Passing of the magic year 2000 (y2k, remember?) reduced need for new Windows servers that were purchased to fix the Y2K bug of the old mainframe systems. Microsoft's growth rates went down dramatically, their stock price did as well. They went from growing revenues 40% a year to 10% and the valuation reflected that. It was this deceleration that hurt the stock the most.

I remember a decade ago, everybody wrote off Microsoft as a growth stock until they adopted the SAAS model and cloud which transformed them from a software manufacturer to a one stop solution for everything computing. Bye bye Dell servers and Cisco routers (those companies were hot back then too) and MS software, hello cheap desktop with MS everything in the cloud. This transformation has been the main driver of Microsoft's revenue since. They are much higher quality revenues AND they, for now are growing faster.

Unless you think that digital transformation is about to stall and our companies stop bringing in new customers and generating incremental revenue from new products, valuation should reflect high growth, high margin and high revenue quality of the companies we own.

Here's a historical chart of MSFT stock price, growth rates, gross margins and P/S ratios. If you think I'm missing something and/or my analogies are wrong, please say so. I'd love to listen and learn.
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