All right, we move to FIN 102. You're right, historical ROE is merely a marker for sustainable growth, the clue is to figure out if the company's strategies, management, execution, exogenous factors such as government etc. will permit it to maintain sustainable growth rates. (After all, while KO's ROE is north of 60%, their P/E is "only" 40, because the market doesn't believe that there will be enough Chinese sipping Coke fast enough to get up to their 200 gals. per year per capita US number.) In MSFT's case your discomfort appears to be in three basic areas: 2,3,4 and 6: Product/market related. It's not fair to say " I haven't heard any informed MSFT investor really address these issues". See Msg. 384 from yrs.truly (the Yahoos haven't gotten to it yet) re telecomm, broadcasting, e-commerce,WebTV, sex ,religion et al. More recently Detsev (Msg. 572) made the same point, though somewhat less elegantly with his vision of "phyrric" (sic) victories. Cash is fungible. MSFT is invested in these businesses and can buy their way into others as they see 'em. 1: Management related. Nothing in Gates'(after all, he IS MSFT) past or recent history says his vision is blurring. If he keeps executing like he has in the past, sustainable growth can be maintained. 5: Exogenous factors viz. Government. This is the wild card, but as I said in Msg. 384, the parts have rapidly become greater than the whole in past break-ups. The key here is there ain't 4 or 6 BG's to head up the spawn, but watch out for the one kept by BIG BROTHER BILL when and if it happens. Ciao.
You're right, Bills vision is as sharp as ever. Only the man who was a sharpsighted rebel at 20 is a sharpsighted Tory now. Chances are that has more to do with the new hair growing in his ears since passing 40 than his business genius. Point is, he's beginning to look, sound, and think like the IBM execs he snookered way back then.
You are right again. If you are stipulating that the future value of Microsoft comes after mitosis -- after it splits into functionally separate cells -- then I have to say that your estimate of 60 is three times too low.
But-- So long as MS keeps trying to pile new floors on that old and moldy foundation, it is very, very vulnerable and the P/E of 50 is perverse. Microsoft as it stands now -- like Apple -- will not sustain growth or value.
If Gates were really a genius, he would have beat Justice at its own game long ago, by setting up separate operating companies for OS's, APPS, Appliances, Wireless, Content etc.
That he has resorted to all of these Byzantine techniques to ensure Windows dominance, rather than building the first if not the best browser based OS -- then he can't be surprised people are beginning to scrutinize. If software development has now turned into legal brief development then start selling.
Justice will precipitate a breakup of Microsoft on terms that will largely make less sense than if Microsoft boldly did it itself on its own terms. It will be bad for the Microsoft Legal Department that is probably responsible for this mess in the first place, but GREAT for MS shareholders.
Now, IF THIS HAS BEEN YOUR PRETEXT FOR OPTIMISM since message 384 then truly I was wrong to suggest that I had never heard a serious investor defend the P/E against all the forces gravitating towards a breakup. So, on those points we can agree, hence on all that follows from them.
Damn we are agreed on virtually every point. It was much more fun slanging each other and beating each others' brains out. The end of a wonderful relationship but it was good while it lasted.
The mitosis metaphor is dead on (wish I'd used the expression originally -- mind if I steal it? Oh, and good of you to explain it for the hoi polloi.). My only point of departure from you perhaps is that with or without the enforced physical splitting up Big Brother Bill can be counted on investing and reinvesting aggressively in new growth areas without regard to ideology, theology, installed base, customer satisfaction, user groups, internal politics, turf battles and all that happy horseshit which by the 80's had definitely turned IBM into an insular, arterisclerotic, aging Volvo-Republican bastion of Neanderthal nay-sayers and navel-gazers , requiring an outsider like Gerstner to breathe life into the corpse. (By the way, I'm long on IBM too, with their 16-17 P/E well below their SGR of 25-30%). And as long as BBB keeps going up to the mountaintop and coming back with his reverse Ten Commandments (figure that one out)and his Gordon Gecko greed and grandiosity intact, the world will be a little better off for capitalism and democracy and the MSFT way of life. Happy Holidays.
Now everybody knows I'm not destined to be a touch-typist. Fumble-fingers and no spell-check. Sigh.
The upper management personalities at division level in MS are more than capable of running each of the separate companies that Big Brother will decree. I've seen them in action from the inside, and believe me, they have as much or more of Gates in them as Gates has in himself.
Given the choice, I would pick Gates' new company or maybe the apps firm headed by Paul Maritz.