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Thursday, July 15, 1999

An Investment Opinion
by Dale Wettlaufer

Random Observations

There are Internet companies and there are internot companies. The former include Yahoo! (Nasdaq: YHOO) or (Nasdaq: AMZN). The latter... well, I don't want to name the internot companies, but I think you can come up with a few. What about the companies in between, though? You couldn't say these are internot companies, but do these companies stack up in terms of business model dynamics? For instance, does eToys (Nasdaq: ETYS) have attractive cash flow dynamics? The operating record is too short to tell, in my opinion. But I really don't envision a really good-looking cash conversion cycle for this business. In addition, how many real options does it have open to it? With a name like, you can build off that brand. With a name like eToys, the strike price on exercising its options to enter new businesses goes up.

On that front, what about eBay (Nasdaq: EBAY)? What are the real options open to it, and is the company pursuing them? Just so I'm not speaking an alien language to you here, one way of looking at a company that is not easily modeled on the continuing value of its current operations is to assess the value of its options to enter new businesses. The value of those options depends on, among other things, prevailing interest rates, the strike price (the cost of entering that new business), the duration of the options (some categories are going to be game-over within a couple years, in my opinion), and the volatility of the underlying opportunity. For my money, it seems like the market is cutting eBay a lot of slack on the continuing value of its business, because I don't see a whole heck of a lot of real options being worked on there.

Free PCs!...

If a cellular telephone is free to the customer upon signing a service contract, that doesn't mean that PCs are free to the service provider. They still have to buy the handsets and the systems somewhere. Look at the model of the wireless telecom industry and look at the model of its most dynamic provider of handsets, Nokia (NYSE: NOK). They look to be doing pretty well to me.

Not a Fluke...

F5 Networks (Nasdaq: FFIV), a company that makes load balancers for service providers and the enterprise market tacked on another $17 13/16 to $71 1/4. I asked the techies here about this company. They're nuts about it. They say their products rock and the company is fanatical about servicing the customer. I've asked our techies about other companies in the past. They usually don't rave like this. Look at this lineup of customers, according to a recent press release: "Exodus Communications, PSINet, MCI WorldCom, Alaska Airlines, Microsoft, Bank of America, Fidelity, Bell South, Compaq, Motorola, Oracle, Excite@Home, RealNetworks, USA Today, NASA, the IRS, the US Navy and over 400 other customers." Remember the name.

How Not to Handle Analysts...

Asset manager and custodian State Street Corp. (NYSE: STT) slid another 3% today after getting knocked down yesterday $6 1/16 to $75 9/16 yesterday. The company's CFO said analysts "overreacted" and "disagree[d] in the interpretation of..." the quarter's results, according to Reuters. Hey, don't mock the analysts, though, if they have legitimate concerns about the quality of the earnings. Without "other" in noninterest income for the first quarters of 1999 or 1998, noninterest income grew 14.4%, rather than the 17% shown in the press release. Still very respectable, but for the CFO to come out and say the analysts are being "myopic" and short-term oriented in their thinking is the wrong way to handle it. Was State Street correctly priced in the $80s? What sort of value should the market put on "other?" Golly. The analysts aren't supposed to be companies' paid cheerleaders. Give them some measure of respect, dude. In any case, the market's much larger than just a couple of analysts. Respect the market some, too.

Nice Press Release...

Capital One Financial (NYSE: COF) gets the award again for one of the most informative sets of financials in its press release. For banks and financial services companies, this is the prototype. The financial presentation on a managed basis is very helpful and provides much more insight than conventional financial presentations.

Old World Companies in the New World...

Check out the mid-year media review of Washington Post Companies' (NYSE: WPO) Chairman and CEO: This company is not sitting around and letting the Internet destroy its franchises. WPC and Tribune Co. (NYSE: TRB) look like they've got the most active thinkers in their executive ranks among all the incumbent media companies. Most clueless-sounding exec of the week? Well, I don't want to name names, but it's ME. And I'm not talking about me -- I'm not an executive.

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