Microsoft vs. Amazon
Glendale, CA (Oct. 20, 1998) -- I'm writing this column on Saturday, October 17, 1998. Since I live in the Los Angeles area, I get to listen to The Motley Fool Radio Show each Saturday from 9:00 a.m. to noon. Today Tom and Dave are doing their 17th broadcast from the National Association of Broadcasters Convention in Seattle, and the theme of the show is "Stockless in Seattle." At one point, Tom -- impersonating Meg Ryan -- is imploring all stockless listeners to put aside a little bit of money and make their first investment in an American business.
Now, I have to make a confession. Much as I enjoy the wireless version of The Fool, I'm rarely able to listen to the whole three hours. On this Saturday, my son Alex had a soccer game and that came first. At any rate, I did catch the entire second hour, which was devoted to a call-in face-off between two Seattle companies.
The idea of the hour was for people around the country to call in and predict which of the two companies' stock would do better during the next five years. As it turns out, the two companies were two of the best performers in the Cash-King Portfolio and The Fool Portfolio. And they are both Seattle companies. They are:
My first reaction to this little tete-a-tete was to burst into laughter. Come on -- you're going to compare one of this century's greatest businesses to a tiny start-up? I thought Tom and Dave were kidding. Microsoft arguably has the best business model ever developed in American industry. Amazon.com, on the other hand, shows promise but it still has yet to turn a profit. I don't follow the stock terribly closely, but I believe current predictions are that Amazon.com could be profitable in 2000 or 2001.
Now I don't want to create the wrong impression here. I love Amazon.com. It's so convenient to point my mouse and dial up books for delivery to my doorstep that I rarely buy books from anyone else today. That is, I rarely buy books from anyone else right now. I understand that BarnesandNoble.com is about to become very serious competition for Amazon.com. International media conglomerate, Bertelsmann, has bought a 50% stake in the business, and the two parents have directed at least $200 million into the business. In the end, my loyalty to Amazon will extend no further than the distance between my wallet and right hand. That $200 million may shake things up a bit.
Of course, Amazon could dominate its industry, but the problem with the radio duel is that David had no choice but to compare his bookseller to Tom's software giant. Microsoft -- the biggest, baddest gorilla in the forest -- has no equal. Yes, the US Department of Justice's Attorney Joel Klein may not like Microsoft. Even Cash-King co-manager Rob Landley doesn't like Microsoft (although I haven't seen him write that it's a bad investment). But there are millions of shareholders out there who absolutely love Microsoft for its stranglehold on not one but two key parts of everyday business life (i.e., computer operating systems and office productivity suites). While Amazon.com is expanding into selling low-margin CDs, Microsoft is angling to take over the entire Internet.
Which filly would you bet on?
Maybe David is basing his position on the anti-trust suit against Microsoft. For his sake, I hope not. First of all, it's unlikely that the case will even be over in five years. Secondly, even if the case is over, it's highly unlikely that the Department of Justice (DOJ) would ask the court to break up Microsoft. Oh, and, there's no guarantee that the Justice Department will even win this case; they lost the last round in the appellate court.
On the other hand, Amazon.com has it's own legal troubles. Top-flight Merchant-King Wal-Mart (NYSE: WMT) has just filed suit, accusing Amazon of hiring away executives and stealing proprietary information. Whether or not there is any merit to Wal-Mart's suit remains to be seen. For this point of comparison, though, let's remember that Microsoft's $14 billion in cash puts it in good position to withstand a lawsuit from even the federal government. In the other corner, Amazon.com has to go to the junk-bond market for cash. I do note that Amazon stock was up $6 the first trading day after the Wal-Mart suit was announced. But cash is king, and legal troubles eat cash.
Finally, we all have to remember that an investment in Microsoft over the next five years is not risk-free. Any investment in equities involves risk, especially in the short-term. The five-year time horizon offered on the radio debate does offer a window large enough that I think Microsoft will do very, very well. But there are no guarantees. Mr. Softy could blow all of its cash on the Washington State Lottery. Or maybe Gates and Ballmer decide to take Microsoft into the supermarket business. Or maybe the entire population of the Pacific Northwest is devoured by killer bees.
All joking aside, can I offer a guarantee that Microsoft stock will outperform that of Amazon over the next five years? Certainly not. Amazon.com's name and community could so gain in popularity that few would bother to buy books, CDs, software, and other items anywhere but on their site -- even if they were cheaper. Further, Amazon.com could turn over its inventory every fifteen minutes. And remember that Amazon is capitalized at just $5.1 billion, giving it far more room for value creation than Microsoft (capitalized at $260 billion). Indeed, five years from now, Amazon investors may be rewarded well in excess of Microsoft investors, owing to the much higher risks they assumed.
Ya never know.
In fact, the more I think on it, the more I like that radio debate. In a way, it just represents the differences between the Fool Portfolio and the Cash-King Portfolio. Our brethren at the Fool Portfolio are looking for small companies that may take off and rocket beyond the moon. When they do, like with America Online (NYSE: AOL), they can make up for a lot of mistakes (which I won't bother to name). Over here on the Cash-King side, we play the game differently. We're looking for a handful of outstanding companies, and we're hoping to make few mistakes along the way.
Both portfolios can succeed. The Fool Portfolio and the C-K model portfolios have both dramatically outperformed the S&P 500 over the past few years. I expect that the Fool Portfolio will be twice as volatile as the Cash-King Portfolio, with twice as many huge successes, and well more than twice as many failures. As for Microsoft versus Amazon, I have my money on the high-margin software giant that's been in business for a quarter century... the one that waited eleven years before going public (not just eleven weeks). Mind you, Amazon.com could do better than Microsoft over the next five years. Or each could be the Fool Portfolio's next 3Dfx. Time will tell.
This week's Fool Poll asks what you think the outcome of the Microsoft anti-trust trial will be. Let your voice be heard. Don't forget to vote.
Tomorrow, Rob Landley (Oak) will be here to respond to this article. And he promises not just Microsoft bashing but a whole lot of love for Amazon.com. That should be memorable. Until then... Fool on!
Al (CashKingAl on the Web boards)
Day Month Year History C-K -0.81% 1.39% 7.09% 7.09% S&P: +0.14% 4.61% 5.76% 5.76% NASDAQ: -0.58% -3.23% -1.63% -1.63% Cash-King Stocks Rec'd # Security In At Now Change 2/3/98 24 Microsoft 78.27 100.25 28.08% 2/3/98 22 Pfizer 82.30 96.56 17.33% 5/1/98 37 Gap Inc. 51.09 57.06 11.69% 8/21/98 22 Schering-P 95.99 98.50 2.62% 2/6/98 56 T. Rowe Pr 33.67 34.31 1.90% 2/13/98 22 Intel 84.67 84.56 -0.13% 2/27/98 27 Coca-Cola 69.11 66.94 -3.14% 6/23/98 34.5 Cisco Syst 57.56 54.13 -5.97% 5/26/98 18 AmExpress 104.07 89.69 -13.82% Foolish Four Stocks Rec'd # Security In At Value Change 3/12/98 20 Eastman Ko 63.15 75.63 19.76% 3/12/98 20 Exxon 64.34 76.56 19.01% 3/12/98 15 Chevron 83.34 87.75 5.29% 3/12/98 17 General Mo 72.41 61.63 -14.89% Cash-King Stocks Rec'd # Security In At Value Change 2/3/98 24 Microsoft 1878.45 2406.00 $527.55 2/3/98 22 Pfizer 1810.58 2124.38 $313.80 5/1/98 37 Gap Inc. 1890.33 2111.31 $220.98 8/21/98 22 Schering-P 2111.7 2167.00 $55.30 2/6/98 56 T. Rowe Pr 1885.70 1921.50 $35.80 2/13/98 22 Intel 1862.83 1860.38 -$2.45 2/27/98 27 Coca-Cola 1865.89 1807.31 -$58.58 6/23/98 34.5 Cisco Syst 1985.95 1867.31 -$118.64 5/26/98 18 AmExpress 1873.20 1614.38 -$258.83 Foolish Four Stocks Rec'd # Security In At Value Change 3/12/98 20 Eastman Ko 1262.95 1512.50 $249.55 3/12/98 20 Exxon 1286.70 1531.25 $244.55 3/12/98 15 Chevron 1250.14 1316.25 $66.11 3/12/98 17 General Mo 1230.89 1047.63 -$183.27 CASH $48.07 TOTAL $23335.26 *Please note: On 8/4/98 $2,000 cash was added to the