Here’s a piece from Janet Lowe’s book – The Man Who Beats The S&P, in which Bill Miller provides some great insights into valuing high-tech growth companies. Here’s an excerpt from the book:
“We buy businesses that sell at large discounts to our assessment of their underlying value,” he explains. “So the question is, where are the best values in the market? Are they among companies that are growing, companies that are shrinking or are cyclical? We own a lot of technology stocks because we think the best relative values are in that sector.”
Recognizing that the economics of high technology seems to lend itself to market domination by a few superior companies, Miller extrapolates forward to the next point.
“Look at tech—Microsoft has 90 percent of its market share; Intel has 90 percent; Cisco Systems has 80 percent. They dominate. This leads to a winner-takes-all situation in most markets.” And down the road, says Miller, “the technology may change, but market positions do not.” Thus, investors can make investments in well-chosen high-technology companies on a long-term basis. Even more significant, he insists, high technology companies “are susceptible to rational valuation. They may have greater volatility, which makes them somewhat different. But it is no more difficult to analyze Dell Computers versus Alcoa or U.S. Steel.”
Ultimately, says Miller, “The only way you can compare any two investments is by comparing what you pay and what you expect to get.”
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