The Magic of Microsoft
It's our #1 holding!
by Al Levit
Glendale, CA (July 14, 1998) -- My co-manager Rob Landley ("Oak" on the Web boards) wrote a column a couple of weeks ago expressing some discontent about the monopolistic practices of Cash-King holding Microsoft (Nasdaq: MSFT). Rob dutifully noted that Microsoft is Tom's favorite stock, and heck, it's my favorite as well. Even though I haven't polled our remaining manager, Phil Weiss, I'm going to take the liberty to call Microsoft "The Cash-King Portfolio's #1 Company."
Why? Well, let me count the ways:
1) A quick look at our portfolio numbers shows that as of market-close Monday, Microsoft is both our best performing stock (up 50%) and the largest holding in our portfolio. Without Mr. Softy in the portfolio, we'd be trailing the S&P 500 by a few percentage points.
2) Microsoft and Coca-Cola are financially the two best examples of Cash-King companies. And I think that Mr. Softy's Cash-King numbers are better than Coke's! Microsoft has gross margins over 90%, net margins over 30%, over $12 billion in cash, no long- term debt, and a Flow Ratio under 0.30. Goodness gracious, oh me, oh my. That's a lotsa mozzarella!
3) The world is going onto the Internet where Mr. Softy will be able to deliver its goods at lower cost, farther away, with greater speed than ever before. Oh me, oh my. (Oh, I already used that.)
Yes, things have been a little rocky for Microsoft this year, as the U.S. Department of Justice (DOJ) laid in against the company for bundling Internet Explorer with Windows 95. Initially, a district court ruled against Mr. Softy on that issue, and the judge appointed a "special master" that Microsoft felt was biased against them. Fortunately for Microsoft, on June 23, a Federal Appeals Court ruled in Mr. Softy's favor on both counts. They opened the door for Microsoft to bundle Explorer into the operating system, and they dismissed the special master.
Currently, the Dept. of Justice is charging Microsoft with the same violations before the same judge, but this time concerning Windows 98. Speculation has it that the recent Federal Appeals Court ruling may have an impact on that case as well. As a result, for the present at least, it seems that some of the powerful, aggressive activities that Microsoft has used in the past will continue unabated in the future.
Even though this recent court action prompted Rob to "vent his spleen" against Microsoft in this very column, the decision had my full support. In case you haven't guessed, I'm a Microsoft shareholder, both personally as well as through the Cash-King Portfolio. Am I biased? Well, I believe there are some very objective arguments that support the appeals court decision.
First of all, it's very telling to look at who stands to benefit if Microsoft eventually loses its case. Normally, when you think of anti-trust activities, you think of the common folk of America on one side and a huge billion-dollar monopoly on the other. But when I look at the Microsoft case, it doesn't fit that generalization. On one side, sure, we have Bill Gates, the richest man on earth with a net worth north of $50 billion, along with Microsoft, which I believe is the strongest public company in our nation's history.
On the other side, we have Joel Klein leading the DOJ anti-trust forces for "the people." But just who are these "people" that would be helped out by restraining Microsoft anyway? Are they ordinary people like you and me? No, no, no. The principal benefactors of Microsoft's loss would be billionaires like Scott McNeeley of Sun Microsystems (Nasdaq: SUNW), Larry Ellison of Oracle (Nasdaq: ORCL) and Jim Barksdale and Marc Andreessen of Netscape (Nasdaq: NSCP). Okay, okay, these last two probably only have hundreds of millions. I stopped counting.
Now I understand that none of these gentlemen are as successful as Bill Gates and that probably haunts them late at night. But if they want to use the Department of Justice as a competitive weapon against Microsoft, let them fund the case all by themselves. They have the bucks. Why do I and you have to pay taxes to help Sun, Oracle, and Netscape compete? Between the three of them, they have more than $45 billion of market value. Do I need to pay taxes to assist them?
I'd feel very differently about this if tens of thousands of computer users were clamoring for relief -- paying exorbitant fees for flawed products. That's who the anti-trust division is supposed to protect: the consumers. But if you look at polls of American consumers, you'll find Microsoft consistently among the five most admired businesses in the nation. I've been a Microsoft customer for a long time. I've also been a customer of Microsoft's competitors. In my experience, the products that Microsoft supplies integrate seamlessly, and their upgrades are frequent and inexpensive. Heck, the upgrade to Outlook 98 that I'm using to type this column was free.
And what I find most important about Microsoft, the part that makes the company stand out as totally consumer-driven, is the outstanding level of service that Microsoft has provided me. Not only does Mr. Softy continue to provide me with free technical support forever on any of the products that I've ever purchased from them, but I'm rarely kept on hold for more than a few minutes waiting to speak to an engineer. Unfortunately, my experience with most of Microsoft's competitors has been considerably less pleasant.
And so, I always look to buy from Microsoft first now. I must not be the only user that feels this way because the open markets have made Windows and Office into standards, without the sort of government coercion that Sun, Oracle, Netscape and other Microsoft competitors are requesting. Even now, no one is prevented from using Netscape Navigator or any other browser with Windows. In fact, Navigator is still the most popular browser. Perhaps it will remain so, perhaps not. If not, it'll probably be because Microsoft continued to improve Internet Explore without charging directly for it.
Is it in the consumer's best interest to prevent Microsoft from improving Internet Explorer and to force Microsoft to charge consumers for it? This consumer doesn't believe so.
Interestingly enough, Netscape stock has been on a tear ever since the appeals court ruled in Microsoft's favor (cf. Netscape's last six months). Without government intervention, Netscape has jarred itself out of a lull and aggressively developed www.netcenter.com -- a serious threat to its competition on the Web. It will now become the default search engine on the most popular browser in use today.
The bottom line for this Fool is that anti-trust should be enforced to make sure that the consumer gets the best product for the lowest price. To date, I believe that Microsoft has delivered on this promise. To the extent that this continues, the Department of Justice should leave one of our nation's favorite companies alone. It also happens to be the Cash-King Portfolio's number one company, as well -- and I expect great things from it as an investment for many years to come.
That's it for today. I'll be back tomorrow with the Wednesday Q&A. Until then...
Stock Change Bid ---------------- AXP +1 3/8 117.88 CHV +1 1/8 82.00 CSCO + 5/8 94.81 KO +1 1/16 87.94 GPS +1 1/4 66.75 EK + 5/8 73.75 XON +1 9/16 72.06 GM + 5/8 69.50 INTC -1 11/16 80.69 MSFT -1 1/8 116.44 PFE - 5/8 118.63 TROW - 1/8 41.50
Day Month Year History C-K +0.42% 5.54% 20.36% 20.36% S&P: +1.06% 3.86% 17.61% 17.61% NASDAQ: +0.15% 3.89% 19.09% 19.09% Cash-King Stocks Rec'd # Security In At Now Change 2/3/98 24 Microsoft 78.27 116.44 48.77% 2/3/98 22 Pfizer 82.30 118.63 44.14% 5/1/98 37 Gap Inc. 51.09 66.75 30.65% 2/27/98 27 Coca-Cola 69.11 87.94 27.25% 2/6/98 56 T. Rowe Pr 33.67 41.50 23.24% 5/26/98 18 American E 104.07 117.88 13.27% 6/23/98 23 Cisco Syst 86.35 94.81 9.81% 2/13/98 22 Intel 84.67 80.69 -4.71% Foolish Four Stocks Rec'd # Security In At Value Change 3/12/98 20 Eastman Ko 63.15 73.75 16.79% 3/12/98 20 Exxon 64.34 72.06 12.01% 3/12/98 15 Chevron 83.34 82.00 -1.61% 3/12/98 17 General Mo 72.41 69.50 -4.01% Cash-King Stocks Rec'd # Security In At Value Change 5/26/98 18 American E 1873.20 2121.75 $248.55 2/3/98 24 Microsoft 1878.45 2794.50 $916.05 2/3/98 22 Pfizer 1810.58 2609.75 $799.17 5/1/98 37 Gap Inc. 1890.33 2469.75 $579.42 2/27/98 27 Coca-Cola 1865.89 2374.31 $508.42 2/6/98 56 T. Rowe Pr 1885.70 2324.00 $438.30 6/23/98 23 Cisco Syst 1985.95 2180.69 $194.74 2/13/98 22 Intel 1862.83 1775.13 -$87.70 Foolish Four Stocks Rec'd # Security In At Value Change 3/12/98 15 Chevron 1250.14 1230.00 -$20.14 3/12/98 20 Eastman Ko 1262.95 1475.00 $212.05 3/12/98 20 Exxon 1286.70 1441.25 $154.55 3/12/98 17 General Mo 1230.89 1181.50 -$49.39 CASH $94.76 TOTAL $24072.39 *The year for the S&P and Nasdaq will be as of 02/03/98