Do You Remember Sun Microsystems?

As I watch Amazon, Apple, Microsoft and Google continue to rip higher week after week, I am reminded of a quote from Scott McNeely, CEO of Sun Microsystems back during the dot com mania of the late 1990’s. Sun Micro was one of the tech darlings back then and eventually reached a peak valuation of 10 times revenues, an incredible multiple, even for a high margin tech software company. A couple of years after the tech bust, McNeely made the following comment:

At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64?
— Scott McNeely, CEO Sun Microsystems

Sun Micro rallied from approximately $5 in 1997 to $64 in 2000, a thirteen fold increase, before falling all the way back to $5 again a couple of years later.


Amazon, by comparison is a low margin online retailer. AMZN had revenues of $178 billion in 2017 so not trading at the same lofty multiple of revenues as Sun Micro. The same cannot be said for its share price performance however. AMZN has rallied from $100 in 2010 to over $2,000 in 2018, a twenty-fold increase. What could possibly go wrong?


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