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Tuesday, December 20, 2005

Technology stocks are different from regular stocks in that they really don't really have any assets. When you invest in a technology stock, you are betting on the people that the company employs. With other stocks, you could reasonably be betting on brand (like coca-cola), or value of total assets (paper companies with land). With technology, total assets and brand are unlikely to represent the value of the company - the ability for the employees to generate valuable ideas now and in the future.

With that in mind, here is an interesting statistic for evaluating technology stocks.

a = Market Cap / Number of employees

This would be the amount of money that the market feels an average employee at the company is worth.

Then:

b = Yearly earnings / Number of employees

This would be the average amount of money that each employee brings in.

a - b = the premium the market is willing to pay. This is equivalent to evaluating the markets expectations for the future. This is the amount of money that the market sees in the future - but that isn't really there today.

oooo...here comes the juicy part. Lets look at Google!

a = 125,000,000,000 / 4000
a = 31,250,000

b = 1,300,000,000 / 4000
b = 325,000

31,250,000 - 325,000 = 30,925,000

he he he... Of course, the P/E gives you a quicker view on this. If the average technology P/E is 25, then if you invest in google, you are betting that each employee is will generate 4x more value then the average technology company employee - just to break even. Incidentally, MSFT has a PE of about 25.

I don't know why it bothers me so much...it is not my money.

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