"The Microsoft Net Fund- Getting Some Respect"
Friday, September 10, 1999 12:38 PM
by Marc Szem
internetstocknews.com
Microsoft (MSFT) is one of the most highly covered stocks on Wall Street, so why don't they get any respect? Sure, Microsoft has the second largest market cap of any publicly traded corporation and trades at 64x trailing EPS, and sure they have the most widely used computer operating system, but investors do not give them much credit for their Internet properties and their enormous investment portfolio. Big mistake.
Microsoft owns some of the hottest sites on the web. MSN.com was just ranked the #3 most visited web site by Nielsen/NetRatings. MSN.com is a portal that offers portfolio tracking, search services, weather, and shopping. MSN.com additionally owns Carpoint (auto shopping site), Gaming Zone (computer games), Money Central (financial news), Expedia (travel), and MSNBC.com (news). That's not all- they also have a free e-mail service called Hotmail and ISP service that may become a free service. This year, they acquired Link Exchange, which allows net publishers to post a link to their site in a directory of sites that have similar content. Microsoft also has the leading web browser, an instant messaging product, and a streaming media product. Yesterday, Microsoft announced that they would begin the pilot program for ASP services on Windows-based platforms.
Now, let's take a look at Microsoft's investments. Over the past three years Microsoft has invested more than $7 billion in telecommunications and Net-related companies. In the telecom sector, they hold shares of Qwest (QWST), NexTel (NXTL), ATT(T), SkyTel (SKYT), Portugal Telecom, and Globo Cabo. They have also made a large investment in broadband access with cable companies such as Road Runner (UMG), and NTL Corp.(NTLI). DSL service providers in the Microsoft portfolio include Northpoint (NPNT), Rhythm (RTHM), DSL.net and Tut Systems (TUTS). Microsoft has other investments in a wide variety of Internet companies such as Internet security provider VeriSign (VRSN), health content portal Web MD (HLTH), streaming media portal Audible (ADBL), and web hosting service Concentrix (CNCX). One of their largest holdings is a 15% stake in CMGI (CMGI) which holds stakes in many private and public Internet companies.
Microsoft does have its problems. The ISP service has not been well received. The Linux operating system has gained a lot of market support and has received a great deal of media attention. On the flip side of Linux, there is the Department of Justice case, which is attempting to prove that Microsoft has a monopoly on the computer operating systems market. Microsoft can overcome their ISP obstacles. The ISP service is a small portion of Microsoft's total revenue. The DOJ case is on hold until September 21. The DOJ's case gets weaker every minute the Linux media craze continues. The Linux issue itself, is a little harder to swallow, but the Linux operating system is only used in 5% of all computers and Microsoft can easily create its own flavor of Linux just as Red Hat (RHAT) has done.
While Wall Street focuses on Microsoft's operational troubles, it has missed the big picture. If you consider the market values and P/E multiples of competing Net companies like AOL (AOL), Yahoo! (YHOO), and Lycos (LCOS), then award each of Microsoft's Net properties similar valuations, then add the value of their portfolio, you get an idea of the value of Microsoft's Internet holdings. Then add the operating systems business, all of their other software products, and $21 Billion in cash. What a bargain! |
