Big Tech valuations - a Thread

Microsoft’s $613 billion market cap in late 1999 seemed absurd in relation to revenues of $19 bn, and yet the company is now worth $1.6 trillion and had revenues of $143 billion this past year. Could this happen again? Let’s run the numbers.

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Microsoft’s revenues have grown by 8.9% in the past 6 years – let’s assume that this continues until the stock trades for the “normal” multiple for S&P 500 index stocks of 2.3. It would take 18 years with zero price appreciation for Microsoft to “grow into its valuation”

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Price-to-sales may not be a valid metric for large tech companies. Software has almost no marginal cost, resulting in higher economies of scale. Also, monopolies face little competition, which means that they can maintain higher margins than the rest of the index

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Let’s assume that big tech valuations should converge versus 20 X forward earnings, which has been the ceiling for the P/E of the S&P 500 index during the dotcom years.

Apple would need 5 years and Amazon would need 31 years to "grow into their valuations".

Caveat emptor

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