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Subject:  Re: How long do P/S last? Date:  12/7/2018  4:33 PM
Author:  XMFBreakerTinker Number:  106385 of 115356

To the Microsoft question, which is of course not prospective. But lets put it in a more extreme manner that supports very dramatically what 12x stated.

Lets say you bought Microsoft at not 10 or 20x but 30x revenue of $185 million (similar to where Zs and MDB and TTD etc are or recently were now).

That is a market cap, extremely "overvalued" of $5.550 billion (toss out enterprise value, just market cap).

Microsoft grew to ~$350 billion in market cap by 1999. So 14 years and appreciation of 63x. Now of course appreciation was probably much quicker earlier, and that would have eaten into later appreciation, but who would care!

The key is, like 12x described, is that the marketcap to TAM made MSFT quite cheap when one considers the incredible (1) CAP, and (2) growth rate.

But you know, in 2004 you could buy Microsoft for probably 20x earnings.

When would you have preferred to buy Microsoft? Turns out both times were good, but for different reasons. in 2004 Microsoft had to make a turnaround that was not so certain at all - and few envisioned the cloud titan at the time.

Meanwhile, while extremely overvalued, a market "darling" selling for more than 100x earnings (using an estimated margin for Microsoft at the time, and at a price to sale of 30x, from a $5.5 billion market cap, with revenues of $185 probably did quite well for yourself.

Of course you probably would have sold out as things changed, growth slowed, etc.

Why is that? Its market cap consumed much more of its TAM, and more than this its growth in eating into this TAM slowed, not to mention later its CAP dramatically decreased (but in 1999 that was not the case).

Of course things are never as simple as we are describing them, but yeah, that is basically it.

Arista at $4 billion market cap and (outrageously overvalued) is a totally different animal from at $16 billion. These things are of course relative to the total TAM and how fast one can grow into that TAM, and high how the CAP is to protect superior returns.

I believe that puts 12x's point into a real world example that seems translatable to the experience of many of us.

And sure, not every "Microsoft" succeeds. That is the risks. But the risk is not being "overvalued". The risk is the business failing to live up to expectations. Whether under or overvalued the stock would disappoint if the business does not live up to expectations.

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