Fool
Portfolio Report
Monday, November 17, 1997
by Jeff Fischer
([email protected])
ALEXANDRIA, VA (Nov. 17, 1997) -- An interesting article ran on the front page of The Washington Post on Sunday, and thanks to the Internet, you can read the article for free right now from anywhere in the world.
The article is somewhat old news about five companies working together to combat Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %>, with their arsenal being the Internet. Number two software company, Oracle, is "informally" working with Sun Microsystems, Novell, Netscape, and IBM to build a common platform through the Internet that uses Java language and Cobra programming. The intended result: a platform of software programs (operating systems) run over the Internet that everyone and anyone can use.
Rather than being quoted about serving the end user, Marc Andreessen of Netscape <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NSCP)") else Response.Write("(Nasdaq: NSCP)") end if %> is quoted as saying, "We all see an opportunity to make a tremendous amount of money as that world unfolds -- as opposed to [a] world where everything is Microsoft and Intel." The thought is, essentially: people will use slimmed down computers to surf the Internet and use commonly shared programs and operating systems over the Internet. Where the money comes from exactly wasn't defined.
Microsoft, meanwhile, is taking a two-pronged approach to the future. Next year the company releases Windows NT 5.0 -- probably its most important product to date. All of Microsoft's future operating systems should build on the base started with NT 5.0, as this product shifts the computing focus from the desktop PC to the network. The system uses servers to power and store information so network computers, or thin computers (what Oracle is so interested in), can be used, but it also runs on a regular PC. This means that users get the speed and convenience of storing data on the hard drive, if they wish, and they can also store data on the server. It's probably the best philosophy, and as David Gardner has reminded here frequently: Things are rarely mutually exclusive. The world is usually not, "It's either this, or it's that;" it's often both. Users will always want the option of using a regular PC or a slimmed down computer and relying on the network. At different times, they'll use different approaches.
Next year Windows 98 will debut as well, and it will use the same type of platform as Windows NT 5.0, until eventually it should assimilate with the Windows NT product line. If I had to bet on Microsoft or the five competitors right now, I would still bet on Microsoft. As the Washington Post article articulates, Microsoft offers a predictable product in a familiar way -- a shrink-wrapped solution that has a phone number on it for when you have questions. Like the UNIX operating system, an Internet-based "doppelganger" operating system might only appeal to a minority because it lacks the industry-wide punch that Microsoft delivers with its universal product and sprawling market share. With Microsoft's installed base of 90% of the operating systems in the world, and with its new operating systems focusing on the network while powering desktop computing too, it's difficult to imagine a giant seachange anytime soon.
An employee from Sun Microsystems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SUNW)") else Response.Write("(Nasdaq: SUNW)") end if %> states at the end of the article that Microsoft had been invited to participate with the five companies on the new Internet platform, but Microsoft "by and large... declined." The invitation is akin to Pepsi asking Coca-Cola to share its distribution network. I doubt that the companies are surprised by Microsoft's reluctance. It'll certainly be an interesting story to watch unfold, either way.
The Fool Port offered a good show today as well, gaining a hefty 3.68% against the market's 1.92% rise. Stocks jumped after Wiseonomic production figures weren't inflation-tinted and after the market in Asia soared nearly 8%. The Fool gained much of its altitude before the close thanks to Iomega. Imagine the portfolio suspended now, hanging in the air like a glider. We'll see tomorrow whether the winds blow us higher or send us reeling.
Iomega <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IOM)") else Response.Write("(NYSE: IOM)") end if %> climbed to a new fifty-two-week high above $30. The stock hasn't seen this level since July of 1996. Today the company announced that the Zip will be offered on the next generation of NEC personal computers (the drive already had been offered by NEC) and that Sharp Electronics will offer the Zip on its notebook PC line.
Iomega has a market cap above $4 billion again, and at this price the stock trades at 25 times fiscal 1998 earnings estimates. Analysts now estimate a five-year growth rate of 28% after an expected 40% increase in earnings per share next year, to $1.22 per share.
America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> rose $2 3/4 after announcing that membership has passed the 10 million mark. The online leader has gained 540,000 members in the last seven weeks, meaning that it could gain as many as one million members this quarter. The growth isn't only in the U.S., of course, but overseas as well.
Finally, 3Com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COMS)") else Response.Write("(Nasdaq: COMS)") end if %> gained $3 13/16, or 12%, as the company introduced its local area network (LAN) backbone switch at the COMDEX trade show with the promise of topping the performance of Cisco System's <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %> similar product. Cisco views 3Com as its largest threat in the ethernet switching market, which will likely replace the ethernet hub market. 3Com has been chasing the switching market for over a year and a half, and though the competition recently began lowering prices, 3Com is holding its prices steady.
The acquisition of U.S. Robotics gave 3Com a much broader product line as it works to offer customers end-to-end networking and the inherent advantages of one-stop shopping. In the remote access market, 3Com's leadership is now difficult to question. The acquisition of U.S. Robotics during the emergence of x2 technology may prove to be as strategically key in the long term as Cisco's acquisition of Stratacom for over $4 billion last year -- or as 3Com's acquisitions of Token Ring, LAN switching, and ATM technology from other companies over the past three years or so. Tom and I Foolishly debated about 3Com following his November 13 Fool recap. Of course all Fools (and especially Tom) champion differences of opinion, and so 3Com might lead us to a Dueling Fools before long. Tom has at least intermediate-term concerns -- which have ample merit, as the stock price proves.
Wall Street has emptied two full magazines of bullets into 3Com's stock since early this year, pushing it below $30 twice and shooting it long after it appeared dead; but it's still difficult to be a long-term bear on the second-leading networking company in the world. Dozens of smaller networking companies won't survive in their present incarnations, but the few emergent leaders are going to continue gobbling up new technologies as they lead the industry forward. It's even more difficult to be bearish about Cisco Systems than it is about 3Com, though Cisco's somewhat lingering reliance on routers (which are technologically inferior to switches) indicates that the company isn't perfect in leading every new change in networking, either.
3Com trades at 15 times earnings estimates for the year ending in May of 1998, and 11 times May of 1999 estimates of $3.00 per share. Let's assume for safety's sake that 3Com won't make its estimates, but let's not try to guess what it will make. If you're only investing in the company for the next 18 months, anything can happen. But if you believe in 3Com's management for the next five years (or longer), the company -- expected to grow over 25% annually during that time -- will hopefully provide a market beating return, especially now at these lower prices. Is 3Com the best investment in the industry? That would arguably be Cisco Systems. Though in the 1980s, Wall Street adamantly believed that Pepsi was a better investment than Coca-Cola, so the point is: nobody knows. Over the past five years Cisco returned 61% annually, while 3Com gained 51% annualized. Where the companies go from here -- like the Microsoft story that opened this column -- will certainly be interesting.
Grab some popcorn and a Pepsi and have a Foolish evening!
--Jeff Fischer
Today's FoolWatch: all the latest in Fooldom.
Have You Given? The Fool Charity Fund
TODAY'S
NUMBERS
|
Day Month Year History FOOL +3.68% 0.06% 24.16% 231.36% S&P: +1.92% 3.45% 27.74% 106.41% NASDAQ: +1.93% 1.29% 25.02% 124.13% Rec'd # Security In At Now Change 5/17/95 980 Iomega Cor 2.52 30.94 1127.68% 8/5/94 355 AmOnline 7.27 76.06 945.84% 10/1/96 42 LucentTech 47.62 84.69 77.85% 8/11/95 125 Chevron 50.28 83.69 66.43% 8/12/96 110 Minn M&M 65.68 94.88 44.46% 9/9/97 290 Amazon.com 38.22 52.13 36.38% 8/12/96 130 AT&T 39.58 48.63 22.86% 8/12/96 280 Gen'l Moto 51.97 62.56 20.37% 8/24/95 130 KLA-Tencor 44.71 45.81 2.46% 6/26/97 325 Innovex 27.71 26.38 -4.82% 4/30/97 -1170 *Trump* 8.47 9.00 -6.27% 8/13/96 250 3Com Corp. 46.86 34.06 -27.31% Rec'd # Security In At Value Change 5/17/95 980 Iomega Cor 2509.60 30318.75 $27809.15 8/5/94 355 AmOnline 2581.87 27002.19 $24420.32 8/11/95 125 Chevron 6285.61 10460.94 $4175.33 9/9/97 290 Amazon.com 11084.24 15116.25 $4032.01 8/12/96 110 Minn M&M 7224.44 10436.25 $3211.81 8/12/96 280 Gen'l Moto 14552.49 17517.50 $2965.01 10/1/96 42 LucentTech 1999.88 3556.88 $1557.00 8/12/96 130 AT&T 5145.11 6321.25 $1176.14 8/24/95 130 KLA-Tencor 5812.49 5955.63 $143.14 6/26/97 325 Innovex 9005.62 8571.88 -$433.75 4/30/97 -1170*Trump* -9908.50 -10530.00 -$621.50 8/13/96 250 3Com Corp. 11714.99 8515.63 -$3199.37 CASH $32438.81 TOTAL $165681.94