Tuesday, February 01, 2005


Microsoft (MSFT) is like a very big freight train cruising down the railroad track and about to meet itself coming around the next corner. The company has increased its book value at about 19% compounded in the past 5 years and the price per share has declined by about 11% compounded during the same period. In the past five years, the little high flying stocks have done the best. Over the next five years, you better not try to stand in the way of 19% compounding.

In the last report, MSFT earnings and revenues were up again and the market is already in a rotation. One of the important events that typically occurs near the shift from recovery to expansion is that Producer Price Increases faster than Consumer Price Increases. Take a look at the PPI and CPI and you can see the shift starting to take place.

This shift makes it tough on the small business that does not have pricing power but a big company like MSFT can ask almost any price in a product up-grade cycle. During the past 5 years, there were indications that MSFT would lose market share. The most recent quarter confirms that MSFT is gaining share and rolling along.

The area of growth for the next many years will be in media servers not personal computers. Personal computers will be upgraded but media servers will be bought. MSFT has the established system for serving up media.

I have subscribed to the movie and music services offered by Real Networks. It is neat to be able to down-load any of 100 movies to view each month. For now, when I watch a movie, I watch it on my 20" computer screen. I like most others need access in the "living room". Many companies are trying to offer the best media system. Recently the big providers signed on with MSFT.


Some see a the potential for a big train wreck between GOOG and MSFT. I see lots of competition but no train wreck. MSFT is going to grow its search business without a doubt. However, GOOG has room to grow this business and to continue to expand into other areas. Both firms are going to grow because our use of the computer is still in its infancy. GOOG reported fourth quarter results today and the results were outstanding. It is hard to believe that a business of this size could grow base earnings by 614% over the year ago numbers. The company exceeded projection for revenues and earnings.

One remarkable statistic is that Google received 48% of its revenues from non-Google web sites. This is where the power lies. The Google business model allows anyone anywhere who has a web site or a blog to participate in the company. The process is incredibly efficient such that Google maintains very high margins while serving millions of small accounts. Every month, my debit card is charged for the advertisements that were placed by Google computers. No human being interfaced with me or my staff.


The price of every investment is composed of two parts. The first part is the intrinsic value or fundamental value. Fundamental value is hard to determine because fundamental value is always based on a guess of the future cash flows provided by the investment and how those cash flows will compare over time to cash flows offered by other investments.

The second part of the price is determined by the fear factor. The fear factor is the publics emotional response. The fear factor converts to the greed factor when the market gets "hot".

Both the market whole market and each stock have a fear factor. Today, when CNBC did a poll asking if GOOG is a buy sell or hold, a large majority rated the stock a sell. This is a measure that shows that the public does not like the idea of buying a "high tech" stock for almost $200 per share (I made my last purchase at $186 recently). The Fear Factor is actually holding the price of Google down. (I can hear the laughs of those sophisticates who do not understand the power of this company.) The utility average is sitting on a 13 month high. The Bullish Percentage Ratio for the group is up to 90%. Extreme indicator levels can last a long time but eventually those who buy "with the grain" will get returns that are below market averages.

During the past five years, stocks have on average traded below fundamental value. The public has been very hesitant to "get back in the market" after the '90's bubble and 9/11/2001. After all these years, the amounts of money in short-term "safe" investments remains relatively high.

Stocks have sold for less than they are worth because of the fear factor. The fundamentals of the economy are still good. Businesses are growing revenues and earnings and the political climate is good for business.

Now is the time to buy and hold solid American companies. The Greed Factor has appeared in a few instances but it has also gotten beat back to a Fear Factor in many cases. TASR is a good example of a stock that went too high on Greed Factor but has since been beaten down.


Jack's Old Merrill Pal said...

So are you buying RealNetworks now?