Drip
Portfolio Report
Monday, February 23, 1998
by Jeff Fischer
([email protected])
ALEXANDRIA, VA (Feb. 23, 1998) -- First, a reminder that on Saturday two $50 checks were mailed, one to Johnson & Johnson and one to Intel. Both stocks continue to be strong. Today the Nasdaq market was sharply higher due primarily to Intel and Microsoft, while Johnson & Johnson made a new all-time high despite weakness on the New York Stock Exchange. Neither stock is extraordinarily expensive, though. Each trades at a reasonable premium to what might be considered fair value.
The Drip Port gained 1.9% today, and for the year we're up a healthy 19% (vs. the S&P at 7%). We've already topped our annual goal of 16% -- but of course, the year is young.
It's an ugly February day here in Alexandria, Virginia -- so gloomy, cold, and rainy that I thought I was in Prague this morning when I woke up. Or New York City. But this is definitely Old Town Alexandria. Just down the street from Fool HQ is George Washington's Alexandria home, literally one minute away, while the church that he attended is two minutes away. Fifteen miles from here is Washington's Mount Vernon home, standing on acres of property beside the Potomac River. It took him two hours to ride horseback from Mount Vernon, along the river, to Alexandria, where he would then attend church, visit guests who were staying at his Alexandria home, or go to Gadsby's Tavern -- a little pub that is still in operation just down the street.
Intel (Nasdaq: INTC) didn't exist when George Washington was here. If it had, George might have owned an intelligent Intel "Torchlight," using it to illuminate the wooded trail (a trail that is still wooded) that took him from Mount Vernon to Old Town. An Intel "Torchlight," you ask? "Intel doesn't sell such cheap, gaudy garbage," you say.
Well, it is getting there.
Over the past weeks we talked about Intel's new markets, primarily the sub-$1000 PC segment. But Intel is also addressing the much less expensive consumer electronics market. In the future, it's expected that millions -- nay, billions -- of little appliances and toys and you-name-its will have microprocessors. The net profit margins on these cheap chips might be as low as 5% (compared to Intel's current profit margin of over 27%), but the market volume and implications are too large to ignore.
The beginning of this tale sounds much like the beginning of the Netscape (Nasdaq: NSCP) and Microsoft (Nasdaq: MSFT) tale -- as well as the Intel and sub-$1000 PC tale. Herein we'll find a lesson or at least a reminder.
When Microsoft was slow to address the Internet and Netscape completely dominatedthe Web browser market, gloom and doom articles about Microsoft were a dime a dozen. Not only did the stories make for good press, but -- finally -- a small company was threatening the behemoth and the David vs. Goliath story is always popular. Critics of Microsoft repeatedly stated that the company was late to the market and the possibly fatal mistake would make Microsoft hard-pressed to gain ground in the browser war. Some wrote that it could be the beginning of the end to Microsoft's dominance.
Recently the same criticism was thrown in Intel's direction regarding the inexpensive PC market. Intel first conceded control of the low-end market to its competitors, before eventually making an about-face. The critics have played up the mistake and warned that Intel might lose (or had already lost) a key market. Again, it makes a good story. So good, in fact, that the same type of story on Intel has recently been repeated with regard to consumer electronics. Intel has been slow to embrace this market, too, and even though it's a newborn industry and nobody has claimed large stakes in it, critics of Intel are bashing the company for its clumsy, slow start.
Intel responds that it hasn't missed anything. The market is only beginning. What's more important to remember, though, is this:
Johnson & Johnson (NYSE: JNJ) might not have the most impressive drug pipeline, but it can acquire a pipeline. There are hundreds of small biotech companies out there -- the type of "hot possibilities" that you hear of from friends at dinner. But a majority of these companies will never outperform Johnson & Johnson. In fact, many of the best of these might be acquired or enter agreements with J&J. Odds are, rather than trying to pick the correct biotech, you'll do much better owning J&J over the decades -- for many reasons.
Similar reasons made Microsoft the company most likely to succeed with the Internet as well, even from the very beginning when Netscape owned the browser market. That didn't matter (it hasn't mattered yet). Microsoft controls the operating system and the browser, for the most part, has simply become another application, one that Microsoft is in the best position to provide. Just as importantly, Microsoft has the cash, business agreements, market share, and distribution means to quickly have much more "Internet presence" than little Netscape could hope for.
The cards are heavily stacked in Intel's favor as well. Intel has the manufacturing capacity, the cash, the employees, the strategic business agreements, the customer mind share, and the market share to make every step forward that it takes count ten times more than does a step forward at a smaller company. If Intel is slow to a certain market, it can make up lost ground much more quickly. Cisco Systems (Nasdaq: CSCO) is much the same. For one, the networking company often buys any small company that develops new and promising technology. Microsoft does as well.
Today Intel announced a finalized agreement with an English company called Advanced RISC Machines (ARM) to produce, sell, and enhance that company's StrongARM microprocessor family. ARM is a leader in designing fast, low-cost, and efficient microprocessors, the type that will be used for small, portable, typically less-expensive consumer products. Intel only recently began to consider the small consumer product market for microprocessors, but already the company has an agreement with a technology leader. And we know that Intel has the resources to make the contract meaningful.
I don't believe that the giant consumer products microprocessor market will be dominated by any single chip company -- at all. There are going to be millions of different products and hundreds of chip suppliers, from Hitachi to IBM to Intel. But surely Intel will have a large stake in this industry if it's good for the company's business. Just as Intel was slow to the Sub-$1000 PC market, it is now attacking it, and the chances are great that Intel will control a large part of the business. It should also do so with consumer electronic devices.
When you're reading a financial magazine about a new threat facing a dominant company like Intel or Microsoft (be it Web browsers, cheap PCs, or consumer products), realize that the company in question is very well aware of the situation and is certainly assessing it with its formidable resources. Too often -- aside from slanting a story for dramatic reasons -- these types of articles ignore the strengths of the leading company that make it so likely to continue leading.
The silver bullet that could maim a company the size of Intel or Microsoft will almost always come from someplace completely unexpected. We certainly won't be reading about it beforehand on the cover of SmartMoney magazine. This is why Andy Grove and Intel thrive on being paranoid -- necessarily so.
Have a Foolish evening...
--Jeff Fischer
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