THREAD $MSFT Tech Bubble Review
At the end of 1999, MSFT was the biggest company in the world with a market cap of $580bn. 12 months later, the stock would be down ~60%. A quick look at the runup and fall of MSFT during the 1999 tech bubble.

Note, I wasn't around professionally then. This is backward looking. Similar to my $AMZN thread ( https://twitter.com/MIcapital2/status/1339672102090072065?s=20) , I am primarily looking at MSFT's revenues/earnings and stock price, not the strategy of the business.

Founded in 1975, MSFT IPOed 11 years later in 1986 at $21/share or ~$580mn market cap. It would finish the day at $28/sh or up ~33%, making the company worth ~$777mn. After accounting for new IPO shares, Bill Gates owned 45% of the company and was worth ~$350mn.

Paul Allen owned 25%, Steve Ballmer 6.8% (top 3 owned 77%!). TTM revs were $140mn growing 37% y/y with nearly 30% GAAP op margins. This means MSFT was trading at ~5X ttm revs or ~4X ntm revs on day 1 of the IPO. On a P/E basis, MSFT traded at ~30X ttm EPS.

Note, the S-1 is not on http://sec.gov  as it only goes back to 1994. I found a link here: http://www.lannigan.org/pdf/Microsoft_prospectus.pdf if interested.

Fast-forward to the late 90s. MSFT would 6X from the beginning of 1997 to the end of 1999 vs. the NASDAQ which would 4X over this same time period.

Per Corry Wang, one big 1999 bubble misunderstanding was that it was largely led by Large Cap Growth, not necessarily internet "fads." See more here: https://twitter.com/corry_wang/status/1345192541545766915?s=20 From Corry's post, we can see that MSFT was over 50% of the total SW's equity value (~$600bn/$1tr)!

MSFT's rise was a function of both good fundamentals and multiple expansion (note: this should ALWAYS be the case for a 6Xer over 3 years).

From 1/1/1997 to 12/31/1999, MSFT's P/E multiple went from ~38X to ~70X. On as Sales basis, MSFT traded at 20X at the peak.

Comparing this to today's 20+X rev mults, a few key differences.
1) SW is objectively a healthier space today. Cos aren't shipping discs to consumers, there are subscriptions, and there is a healthy ecosystem of tech cos as well as old guard cos embracing tech/SW development.

2) At $20bn in revs, MSFT's penetration of TAM was likely higher than a lot of software cos today (NOW at 20X is run rating at ~$4.5bn in revs today).

3) On the flip side, MSFT with 35% GAAP net margins was vastly more profitable than almost every software company is today.

Fundamentals were also strong. Revs/Net Income went from $11bn/$3.4bn for the twelve months ended 6/30/1997 to $23bn/$9.4bn for 6/30/2000. Good for CAGRs of 28%/40%.

Unlike AMZN, MSFT was expensive but had real EPS to back it up. One would think this would be helpful for MSFT's ability to get back to its prior highs. AMZN took 8 years (2007) to reach new highs. It would take MSFT 15 years (2015!) to get back to the stock highs of '99.

A few things going on under the hood here.

1) MSFT would go on to pay out ~$100bn in dividends during these 15 years including a one time special dividend of ~$32bn in 2004.

2) Looking at stock price per share vs. market cap, stock repurchases matter. MSFT repurchased ~$135bn worth of shares during this period.

However, even accounting for divs, MSFT was a bad investment at the peak, and not a good one from the post 1999 lows until recently:

If you had bought MSFT at the 1999 peak, it would have taken until 2014 for you to make money on your investment. 15 years. Then even today after a great run over the past 6 years, MSFT would have only compounded at 9%.

If you bottom ticked MSFT in 2000, you could have made a great return after 1 year, but MSFT was basically a dead stock for years post 2000. Held to today, you would have annualized 15% (vs. NASDAQ 10%).

What happened to MSFT's fundamentals after 1999?
Growth slowed from 20-30% in '99 to as slow as 0% in mid 2000 (1 qtr) and then rebounded to low teens. MSFT's rev growth was lumpier back then as it wasn't subscription revs, it was highly dependent on PC and SW refresh cycles.

Post 2000, MSFT never really got its groove back.

Rev growth stayed low teens (~= today's growth. In FY20, MSFT added $17bn/$7bn in Revs/OI, basically a '99 MSFT in 1 year!) and despite solid rev growth, OI growth was anemic (FY02-03 saw a few large antitrust/lawsuit charges).

Why was MSFT's stock performance so terrible despite OK rev/earnings growth? Obviously multiple compression. MSFT's forward P/E multiple declined for the next 15 years from 70x in 199 to 30X in 2000 to as low as 10X in 2010.

Conclusion: Hard to extrapolate MSFT because they had so many Co specific issues (Antitrust/mobile) BUT my takeaway is Valuation Always Matters. There IS a limit to what multiple you should pay. Even after '99, MSFT reported solid growth for many years and the stock UPed greatly.

Note, when looking at big cap Tech multiples today, it doesn't even compare to MSFT in 1999.

Resources:
For more on what MSFT did wrong and how dire its prospects looked in 2014, I recommend this piece by Ben Thompson: https://stratechery.com/2014/making-sense-microsoft/
Goldman recap of the IPO https://www.goldmansachs.com/our-firm/history/moments/1986-microsoft-ipo.html