Fool Portfolio Report
Friday, March 7, 1997
by Jeff Fischer (MF BudFox)
ALEXANDRIA, VA., (March 7, 1997) -- The Fool and the S&P both gained 1.79% on the week, though for the year the Fool trails by a significant amount. It'll take time digging from any hole we get into, but we have plenty of time.
There was no significant news this week, aside from AT&T (NYSE: T) lowering its earnings outlook and ill-tidings at FORE SYSTEMS (Nasdaq: FORE) sending networking stocks lower still, including the Fool's 3COM (Nasdaq: COMS)(see the Evening News). Time. We have plenty of time.
With this recap begins a periodic review which will be detailed near the end of the column.
ONE. MICROSOFT (Nasdaq: MSFT) came public in 1986 and Bill Gates is now 40 years old. Realistically you have 25 years more in which to invest in Microsoft while Bill Gates remains at the helm. $10,000 invested in 1986 is now more than $450,000. Is the best behind the company?
The Internet is an infant in Microsoft's crib. The Internet needs to be raised. Microsoft has over $8 billion in cash and is spending $2 billion on research and development this year. For one, the company is working to create desktops that flow seamlessly to the Web. In less than two years Microsoft has stamped the Internet with, "Where do you want to go today?" Controlling 90% of the operating systems in the world hasn't hurt in figuring how people answer Microsoft's question.
Microsoft is small. Microsoft is new. It's always rejuvenating. The company attracts and retains some of the best talent in the industry, the youngest and brightest, those who grow up on the Internet. They're just beginning their careers. They have yet to "take over the world," but they want to. Microsoft will finance it. "Welcome aboard. Here is your budget. Here is what we want to do (completely dominate). Let's do it." Has there been a more exciting time than now for computer-related companies?
The industry is in its infancy. Ask in five years, "Is it still in infancy now?" The answer will be yes.
TWO. DELL COMPUTER (Nasdaq: DELL) is selling product from its Web site and stated revenues are above $1 million per day, while growing 20% per month, according to Investor's Business Daily. Customers are willing to buy $30,000 servers through the Internet (and why not? these customers most understand the Internet, so feel secure using it to purchase products). What might this growing trend of less expensive direct-purchasing mean to "middle-men" computer sellers the likes of GLOBAL DIRECT MAIL (NYSE: GML) and CDW COMPUTERS (Nasdaq: CDWC)?
THREE. Every minute of every day, hundreds, if not thousands, of people are drinking a COCA-COLA (NYSE: KO) beverage. At every moment.... CRACK... phhhhzzzzz.. glug, glug, glug... ahh. Happening from now until, perhaps, the day all of us sign off for good. Even then they'll probably still be going CRACK... phhhhhzzzz... glug, glug, glug. Ahh.
Those who argue against the stock's valuation, while possibly possessing merit (for the near-term only), always fail to mention the company's aggressive share buy-back plan.
FOUR. INTEL CORP (Nasdaq: INTC) controls the microprocessor industry, has a hand in networking and a strong hand in adapter cards, and has enough of a presence in video-conferencing that leader PICTURETEL (Nasdaq: PCTL) expects to lose market-share. Intel may also emerge as a leader in network computers, and is working on data encryption hardware. The company commands gross margins around 60% and exceptional net margins of 23%. All of this and "world-beating" status, too, trades at 16 times this year's estimate, and 14 times earnings expected next year. Irrational exuberance in this stock? Don't think so. Some expect Intel to grow revenues by over 40% this year, after sales growth of 32% annually the last two years.
Meanwhile, Prudential's Mark Edelstone downgraded shares of Intel on February 5th, causing the stock to fall $8 in one day, to $157 (and it has slid ever since). We'll see where Intel is trading when the firm upgrades the shares again, and follow why they upgrade. Before that, in a future recap, we'll detail the reasons behind Prudential's initial downgrade of Intel.
FIVE. Imagine that Disney Land is the Internet. Imagine AMERICA ONLINE (NYSE: AOL) is a smaller park on the outskirts of the Magic Kingdom, but that it has its own attractions and offers access to Disney Land, too. Good deal, eh? But the lines are long, and too often you can't even get into the park.
Imagine that people are desktops (they are, in a sense), and that desktops (on networks) are becoming seamless with the Internet. Where might that leave AOL?
For how long will businesses want to work with AOL when the Internet will be available -- reliably -- 24 hours a day, one click away, while commanding many more eyes than AOL. America Online must offer 100% reliable access and service. It knows this, we all know this. It also needs to offer superior technology (and readership) in order to attract business (and advertisers) away from the Web. Currently AOL has an edge in technology over the Internet, and holds the best online community, comprised of 16 million eyes; but it doesn't yet have the reliability that users demand.
Meanwhile, suppose AOL loses the edge in technology it currently has over the Web. The world is working together to improve the Internet. Where does AOL stand? Also, what effect might ubiquitous network computers have on AOL if those network computers focus most on the Internet?
SIX. What effect might ubiquitous network computers have on Microsoft? Though Microsoft is "small," its market cap isn't. Not at 12 times sales, or $116 billion. ORACLE CORP (Nasdaq: ORCL), the second largest software company, argues that the information age will become readily available to everyone only through affordable network computers (NCs). With Oracle, Sun, Intel, IBM and others working on this technology, NCs have a good chance of making a sizable impact. Sales estimates run as high as 3 million units by the year 2000 (Dataquest estimate). As the world becomes more network-centric, how many businesses and individuals will be able to rely on networks, and not need desktop software?
Meanwhile, Oracle fell over 10% this week on an analyst's concerns, and now trades at 21 times estimates five business quarters out, while expected to grow about 30 percent annualized. Oracle's push for network computers may hurt Microsoft (though the company is developing a model, too), but -- eye for an eye -- one argument this week was that Microsoft's eventual releases of its SQL Server database system could eventually (in the long-term) challenge Oracle's core business. Still, we're dealing with number one and number two in software, here. Hardly two investments to run from screaming.
SEVEN. MCDONALD'S (NYSE: MCD) operates over 18,000 locations and is opening six new restaurants per day this year, most of them international. It controls over 40% of the fast-food hamburger market in the United States. The stock trades at 17 times the year's estimates, while the company is expected to grow 14% annually the next five years. The stock hasn't moved up since late 1995, and doesn't look ripe to move anytime soon. Does Mickey D's have staying power? Hmm. 49 years and counting. Worth watching long-term?
END. I want to see where Microsoft is five, ten, twenty years from now. I want to see where Intel is, too -- all of these stocks, actually. The stories for the technology firms change so quickly, let's look at these stocks every six months and give a quick update. Short-term, we can expect smart volatility. In the long-term, though, the companies which remain leaders should be incredible investments.
Where do you want to be in twenty-five years when Bill Gates may retire, while his company may continue with vibrancy? Bill Gates spent this past week in India and Africa, promoting Microsoft. He probably drank a few Cokes, too.
Let's start now, and check back each six months. If I stop writing this column I'll try to pass the tradition along. I'll focus on general trends and news in the future updates, the next one being the first week of September. Recording the beginning prices:
Dell Computer (Nasdaq: DELL): $72.50 Microsoft (Nasdaq: MSFT): $96.75 Coca Cola (Nasdaq: KO): $60.50 Intel (Nasdaq: INTC): $143.50 America Online (NYSE: AOL): $42.00 Oracle Corp (Nasdaq: ORCL): $35.75 Mcdonald's (NYSE: MCD): $44.50 Cisco Systems (Nasdaq: CSCO): $51.38(Networking leader CISCO SYTEMS (Nasdaq: CSCO) wasn't written of above, but we'll follow it as well -- it dominates an industry growing 30 to 50% annually. The Internet is an infant, but it isn't residing only in Microsoft's crib. It's very much in Cisco's -- and Oracle's, and Sun's, and many companies we've not yet heard of. Dozens of companies will parent the Internet, of course -- and everything that it becomes).
DUMB AD of the week goes to a company promoting its real-time quote machine. In a newspaper, large bold print reads:
The market's up,
you're at lunch.
The market's down,
you're at a meeting.
The market's moving,
why are you out of touch?Please Click Here if you watch the market that closely.
Below are links to interesting reading for the weekend. Whew... Done with this recap!
... CRACK... phhhhhzzzz... glug, glug, glug. Ahh.
Fool on!
Weekend Reading
A) Some think Network Computers are the wave of the future. Microsoft states, "We're sticking with the PC." Bill Gate's Comdex96 Speech is excellent reading for anyone interested in learning the reasoning behind Microsoft's stance -- and in how Bill Gates sees the future.
B) Larry Ellison of Oracle Corp sees things differently. Here are some reasons why, and also see the related stories, top right of the following linked Web page, to learn more on the Network Computer.
C) Intel Corp's Strengths, especially relating to networking.
D) Computers are as young as they'll ever be. What about 50 years from now?
E) A Few Kind Words About AOL (check out the unWise end).
F) Visit Intel and see the blue space-guy, which The Fool now dubs as "Sammy." (You won't see Sammy when using AOL's browser).
G) Coca Cola's pages can be fun.Best for last:
A) Fool's Gold / Fool Wires
B) Fool's Industry Reports
C) Fool's RogueTODAY'S NUMBERS
