Microsoft Bear's Rebuttal
by Paul Larson ([email protected])

Notice that Jim compares Microsoft to both Coke and Gillette. This does not surprise me since both Coke and Gillette, like Microsoft, are also great companies with ridiculously bid up stock prices. Microsoft may be just as expensive as Coke, but let us suppose that Coke is overvalued and ready to take a tumble. Then what? Relative valuations have their merits, but so do absolute valuations.

Jim points to the earnings growth that the company has had in the past as a rationalization for the premium the market is paying for Microsoft's stock. You will get absolutely no argument from this Fool that the company has superbly outsmarted its competition and keenly grown its earnings in the past. But that's in the history books. What about what we should really care about? What about the future?

Clearly, further earnings growth is needed to justify the price tag currently attached to the stock. The cash rich businesses of the operating system and office-suite software are already built into the trailing numbers, and then some. What ever happened to discounting risks such as NCs (Network Computers), Java, and, of course, the ominous threat of government regulation? This is the technology arena we are talking about here, and things can change in a heartbeat. Just ask Apple. In any case, I think the point I made in my initial argument still stands -- future earnings will come with much greater difficulty than those booked in years prior.

To end this rebuttal of Jim's argument, I thought I would quote from the online chat Microsoft's CFO, Greg Maffei, recently had with the Fool. I think he summed up in one sentence an important point I made in the initial argument and wish to emphasize again. As can be read in the chat transcript, here's a key answer to a question not to be taken lightly:

TMF Bogey: Interesting. Okay, back to the audience: "Now that your capitalization is 2nd only to GE, is growth at the rate we've seen still realistic?"

GMaffei MS: I have been cautioning for awhile that growth is slowwwinnngg.

Notice that Greg didn't just say that Microsoft's growth is slowing, but that it is "slowwwinnngg." Is it really prudent to buy a stock at 60x earnings when earnings and absolute growth are slowwwinnngg? Me thinks not.

Next: Cast Your Vote!