Gorilla Game Finale
by Al Levit
by Al Levit
Glendale, CA (June 19, 1998) -- Before getting to the final column on The Gorilla Game, I'd like to formally welcome Cisco Systems to the Cash-King Portfolio -- the company pushing the Internet into our lives with increasing frequency and familiarity. The poll ended yesterday evening, and the final results are available by clicking: The Final Tally of the Cash-King Poll. General Electric put up a good fight, as did Dell. And obviously, Tellabs and Schering Plough are extraordinary companies. We were very pleased to have over 3,100 votes -- one of the more popular polls in Foolish history.
On Monday, we'll be posting our buy report for Cisco Systems (Nasdaq: CSCO). Then, over the succeeding five days, we'll add Cisco to our portfolio for the long haul. Huzzah, and thank you all for providing such a thorough investigation of so many great companies in the new Cash-King Companies folder. A wonder to behold over the past two weeks.
Ok, on to tonight's report. In the last couple of days we've done a fairly extensive review of The Gorilla Game by Moore, Johnson, and Kippola. On Tuesday, we began by defining what gorillas were, and why they were unique to the high-technology industry. On Thursday, we explored how a high-tech market can produce a gorilla.
At the conclusion, we were left with several questions concerning Microsoft (Nasdaq: MSFT) and Intel (Nasdaq: INTC), which are the two technology gorillas in the Cash-King Portfolio. Are they still gorillas? Should we be worried about them losing their luster, their yell, their hunger for more fruit, more more more?
I'll begin today by answering those questions. Let me restate the questions I left you with yesterday:
1. How much of a premium, if any, should I as a shareholder receive for their gorilla status?
As noted yesterday, the gorilla premium comes from three main sources:
There is no question that by the time we purchased both Microsoft and Intel all three of these strong gorilla qualities were evident. A reasonable assumption is that the market had priced in this value already -- as both companies were at the high end of their historical P/E ranges. So... were we too late in the C-K portfolio?
The authors of The Gorilla Game don't think so. (Neither do we.) They maintain that the market in general tends to under-price gorillas through most of their lifetime. The long-term history of Microsoft and Intel would tend to bear this out, particularly Microsoft which has $12 billion in cash, no debt, huge opportunity around the world, and which many on Wall Street still feel should trade off its one-year projected growth rate. We like that thinking -- it gives us a chance today to buy up Microsoft's highly likely high profitability a few years down the road.
In this respect, I find that gorilla investing can walk hand-in-hand with the Cash-King method of investing. You don't need to buy a gorilla, in their words, at the bowling alley or at the beginning of the tornado. I certainly wouldn't OBJECT to such great timing -- and we'll definitely look for this sort of company to add to the C-K portfolio at some point in the years ahead. With ten solid Cash-Kings and the Foolish Four pounding ahead, one Cash-Prince would be good fun and possibly greatly rewarding. But the critical point we believe is that you can do just fine, thank you, by picking up the gorilla in mid-life and, in so doing, minimize your workload (let's not underrate that!).
However, we do have to be careful about points 2 and 3 above -- what happens if either Microsoft or Intel loses their gorilla status and how might we tell that they are? According to gorilla theory, trouble will come hard and fast when a discontinuous innovation comes about that puts an end to the gorilla power of either Microsoft or Intel. Fortunately, I don't see either gorilla being threatened anytime soon -- though there have been murmurs about Intel.
Let's consider Mr. Softy first. Microsoft not only has PC operating systems locked up with Windows, but its share of office productivity suites is just as strong, so it has two gorilla products operating at the same time. Microsoft is also gradually and methodically integrating the Web into all of its offerings.
Further, Microsoft is starting to establish a new gorilla position with Windows CE and appliance software as they help Casio, HP, Everex and several others to challenge 3Com's PalmPilot with Microsoft's proprietary, open system that links seamlessly to Outlook 98. Windows CE is also being developed to be used 1) in cars for navigation (it will operate on voice commands, so that the driver won't be distracted from watching the road), and 2) in entertainment (it will work with set-top boxes on Web TV). Other applications for CE are also being developed including Dreamcast, a new computer game system coming out next year that will compete with Nintendo and allow developers to easily import the games to PCs.
Of course, a natural question with Microsoft's gorilla power is the government's current anti-trust case challenging their right to incorporate an Internet browser into Windows 98. This is a gorilla war between Microsoft and Netscape (Nasdaq: NSCP), and the government (a time-tested gorilla in its own right) to date has taken Netscape's side. My personal feeling on this issue is that the scope of the case is not sufficient to threaten Microsoft's overall gorilla position, at this time. And I believe that the stock market in general concurs, since the stock price has been restrained, but not reduced.
As far as Intel is concerned, we know that they come out with a new generation of microprocessors every year or two, and they constantly force all of their competitors to catch up to them. Personally, I don't see any discontinuous innovations down the pike that would threaten their existence.
I know of the threat to Intel of low-priced PCs and computer appliances, which will drop the value of the microprocessor. But I also know that the history of technology is more about recurring high-end development than it is about price warring. For now, I think Intel is solid. Rob Landley is closer to this company than I am, and we'll trust that he'll warn us if he sees danger ahead. Nothing like working with a small team of investors, eh? Foolish.
As I finish this extended review of The Gorilla Game, I need to point out that sometimes a high tech market does not produce a gorilla. These are markets that start out with a tornado, but in which there are no proprietary standards. The authors list many examples, including fax machines, monitors, keyboards, disk drives, mice, and modems.
I have a bit of a radical notion -- I also believe that the direct-purchase market for PCs is an example of a no-gorilla market. The PC market produces leaders, and the authors call the leaders of such a non-proprietary market kings (however, please notice that it is all lower case, and there is no Cash- in the beginning). Kings enjoy a number of gorilla-like benefits, but they can't force their competitors onto the defensive the way gorillas can.
My favorite king, according to this definition, is Dell (Nasdaq: DELL). The last time I wrote about Dell I said that it was a great company and that I hoped that it would do as well for me and my fellow shareholders in the next two years as it had in the past nine months. That was in March. Dell has done better in the two months since then, on annualized basis, than it did the previous nine months that I'd written about. Moreover, Dell just released its earnings for the first quarter of 1999, and it was another terrific quarter. In other words, I remain one very happy shareholder.
However, as I mentioned in my previous write-up, I don't consider Dell a Cash-King. I mentioned in that column that I would be watching Dell's quarterly reports very closely for any sign of trouble, because the low margins inherent in Dell's business model make them a riskier stock over the long term. It turns out that the gorilla game rules on leaders that aren't gorillas are similar. The authors understand that gorilla game investors may invest in non-gorilla leaders, but they recommend that they be watched and possibly sold much more aggressively than gorillas.
For the record, Dell beat earnings estimates by two cents last quarter, and improved both gross and operating margins. The market decided that performance wasn't good enough, and the stock price has fallen since the earnings release. I, for one, do not consider that anything like a business stumble -- it's a valuation issue, and I largely steer clear of those. Dell did add almost $500 million of long-term debt to the balance sheet, which was a mild negative. However, given that the debt sits next to cash and marketable securities of over $2 billion, I'm not terribly worried. They just found a low interest rate.
I still felt compelled to write to Dell about the new debt anyway. Here's what they wrote back to me:
"The $500 million in debt was taken on for general corporate purposes and expansion. We must pay it down over ten and thirty year periods. There is a slight spread differential between the debt and corresponding investments."
Duly noted. I will continue to watch things closely.
That will close out my week. Rob Landley will be here on Monday. I'll be back with you in July.
Until then... Fool on!
Day Month Year History C-K -0.34% 2.24% 8.13% 8.13% S&P: -0.52% 0.90% 9.92% 9.92% NASDAQ: +0.48% 0.14% 7.77% 7.77% Cash-King Stocks Rec'd # Security In At Now Change 2/3/98 22 Pfizer 82.30 111.25 35.18% 2/3/98 24 Microsoft 78.27 94.63 20.90% 2/27/98 27 Coca-Cola 69.11 80.38 16.31% 5/1/98 37 Gap Inc. 51.09 58.75 14.99% 2/6/98 56 T. Rowe Pr 33.67 35.06 4.13% 5/26/98 18 American E 104.07 106.63 2.46% 2/13/98 22 Intel 84.67 69.94 -17.40% Foolish Four Stocks Rec'd # Security In At Value Change 3/12/98 20 Exxon 64.34 70.06 8.90% 3/12/98 20 Eastman Ko 63.15 67.13 6.30% 3/12/98 15 Chevron 83.34 81.31 -2.44% 3/12/98 17 General Mo 72.41 67.13 -7.29% Cash-King Stocks Rec'd # Security In At Value Change 2/3/98 22 Pfizer 1810.58 2447.50 $636.92 2/3/98 24 Microsoft 1878.45 2271.00 $392.55 2/27/98 27 Coca-Cola 1865.89 2170.13 $304.24 5/1/98 37 Gap Inc. 1890.33 2173.75 $283.42 2/6/98 56 T. Rowe Pr 1885.70 1963.50 $77.80 5/26/98 18 American E 1873.20 1919.25 $46.05 2/13/98 22 Intel 1862.83 1538.63 -$324.21 Foolish Four Stocks Rec'd # Security In At Value Change 3/12/98 20 Exxon 1286.70 1401.25 $114.55 3/12/98 20 Eastman Ko 1262.95 1342.50 $79.55 3/12/98 15 Chevron 1250.14 1219.69 -$30.45 3/12/98 17 General Mo 1230.89 1141.13 -$89.77 CASH $2037.63 TOTAL $21625.94 *The year for the S&P and Nasdaq will be as of 02/03/98