Microsoft's (NASDAQ:MSFT) stock is a story of market irrationality. Despite its enormous tailwinds, talented management, and valuable software, Microsoft traded at a P/E of just 20 in 1990. This was not your typical, unprofitable tech company. Microsoft was an aggressive competitor that was about to monopolize the industry of computer operating systems, as well as internet browsing with its Internet Explorer. Looking back, the company was tremendously undervalued.
If we move forward 10 years to the dot-com bubble, Microsoft traded at 60x earnings. Despite its stretched valuation, Microsoft's growth prospects were actually worse than they were 10 years earlier. This level of extreme enthusiasm proved to be unsustainable, and the bubble burst.
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