ALEXANDRIA, VA (Feb. 3, 1998) -- First things first, this evening we announce our plan to add a third company to the Cash-King portfolio in the coming days, and... gasp! Holy Toledo! Good gracious -- it's a mutual-fund company! The CK portfolio is picking up shares of T. Rowe Price Associates (Nasdaq: TROW), and our explanation of how we Fools could ever select a fund company -- when we think that much of the managed-fund industry is seriously threatened in the decade ahead -- is outlined in our report. Click here to read our T Rowe Price Buy Report.
Elsewhere in CK-ville, around noon today we picked up shares of Microsoft (Nasdaq: MSFT) at its all-time high as well as snatching up Pfizer (NYSE: PFE) a few bucks below its all-time high. February 3, 1998 will live on in our memories as the day we paid more than 50x earnings for a multi-billion-dollar software company! Microsoft has $3.5 billion in trailing profits today, and to justify that multiple off earnings over the intermediate term, they're going to have to double those earnings in the next 3-5 years.
Finding $3.5 billion in new profits might seem a monumental challenge, particularly since locating 3.5 billion of anything in life seems unthinkable (what, there are something like 250 million people in America... so Microsoft has to find the equivalent of dollar profits 14x greater than the number of people in America. Fourteen different United Stateses will have to each hand over a dollar of profit to Microsoft for them to clean double their earnings from here. Ok, ok, I'll stop!). But while it's no simple task, Microsoft is operating in and leading an industry that is like no other today. Think of the role that software will play in the future of communications, the collection and distribution of information, the global sale and distribution of products, the flow of money, even improvements in transportation in the next century. And much more. Mind-boggling.
But finding an industry in great demand is just one of the many tasks we face. I think one of our many other challenges as Cash-King investors is to track down "light" products or "very soft" goods being sold into that buzzing demand across the globe. The mass production and delivery of small things at inexpensive but inflatable prices has proven an extraordinary model for successful business in the 20th century. Now, the burst into an information-heavy Communications Age is a move into a world that will even more richly reward companies that can "glide" their products across the planet. Companies that don't demand heavy investments up-front, companies that can deliver products and services around the world, companies that have built and are further securing a name-brand franchise, companies that have pricing power on inexpensive products that are repeatedly purchased.
In my mind, software is the single greatest example of this model. Light products, high margins, global opportunity. The world will not run out of room for new software applications anytime soon. And the ace-in-the-hole value that the industry brings is that its product-development process and the worldwide demand for it is limited only by our imagination. Today's applications can be, and need to be, greatly improved upon. Signing onto the Internet has to be much like picking up a telephone or turning on a television set. Landing at www.fool.com should not require a whirring and hiss, a slowly-framed unfolding of screens, and limits on our abilities to sort and arrange features & data. Moving around the Internet will need to sound more like this, "Click, sort, swish, swish, click." And the total integration of audio and video capabilities is going to demand an awful lot of creative work.
Better machines will make this possible, yes. But software will make it happen.
So yes, we've just purchased Microsoft at its all-time high (we bought at $155.875, which includes a $7.95 commission). The market has never valued this company as dearly as it does today. We can't and won't bury our heads in the sand about this. MSFT may fall to $120 per share; our stock market may then collapse after further corruption is exposed in the Asian markets; next, our software giant may flail about atop their empire building, like King Kong, surrounded on all sides by small, whizzing competitors. And ultimately, we could even lose money on this investment.
For that reason, we're going to keep a close, critical eye on the financial statements as they float past every three months. And there may come a time when Microsoft looks considerably less attractive to us than it does today. For now, though, with gross margins above 85%, pumping more research & development money into the Internet than its largest online competitor has in annual sales, with a truly world-class brand name, and a clear lead in an industry whose demand will double and then double again, and again, in the years ahead -- Microsoft really is the classic Cash-King investment.
(For a worthwhile article about Microsoft and the Justice Department, with historical context about IBM's previous trouble with this same foe, please see http://www.usatoday.com/money/mds5.htm.)
Tomorrow, I'd like to cover some of the interesting ques