Dear David: Well here is one person who feels best way to invest in Internet is to buy SUNW. JDN
Sunny Side Up for McNealy & Co.
By David Jennings
Friday, April 14, 2000 10:09:00 AM
After listening to an online recording of Sun Microsystems' (Nasdaq:SUNW) third-quarter conference call -- for the second time -- I couldn't help but agree with a statement by Ed Zander, the company's chief operating officer: "Sun is synonymous with the Internet."
With quarterly revenues of $4 billion, a 35-percent increase compared with $2.956 billion a year ago, plus Zander's guidance of forward growth of 25 percent, the basic strategy of this computer hardware and software services behemoth is to be everywhere, at all times, for any user of what the Internet is now -- and whatever it will be in the future.
For the record, Sun reported net income of $436.2 million, or $0.26 a share, compared with net income of $292 million, or $0.18 a share in the year-ago period. The results topped analysts' projections of $0.23 a share, according to First Call/Thomson Financial, which tracks earnings estimates.
When it was Scott McNealy's turn to speak, the 44-year-old CEO remarked, "actually the game is getting every 'thing' (his emphasis) connected to the Internet." He literally means every gadget would have a "digital heartbeat," including ordinary light bulbs, and all would be continuously wired to the Web. This systems approach has been McNealy's focus since the company went public in 1988.
From an Internet investor's standpoint, two basic themes have evolved. Investors favoring the slow-but-steady approach concentrate their holdings in shares of the "plumbers," such as Sun or Cisco Systems (Nasdaq:CSCO). The fast-money crowd buys dot-com startups intent on developing distinct parcels of Internet "real estate." Investors who suffered through some volatile periods after buying early into streaming-software supplier RealNetworks (Nasdaq:RNWK) are sitting on nice returns. But those who bought downloadable-music provider MP3.com (Nasdaq:MPPP) on the day it went public crashed and burned.
During the conference call, McNealy emphasized Sun's strategy for investing in startups. Sun provides them with cheap product bundles to help them get started quickly. The payoff comes later: if they become successful Internet players, they'll buy more of Sun's products. Sun has allocated $200 million for this purpose, and it will be accounted for as a separate item on the balance sheet.
Here's an example from a February 10-Q form filed by Digital Island (Nasdaq:ISLD). Digital Island, whose aim is to provide private global networks for business users, formed a strategic relationship with Sun and Inktomi (Nasdaq:INKT). Under the relationship, Digital Island "agreed to purchase, over a two-year period, up to $150 million of Sun servers, storage operating systems and server software, using Inktomi network caching applications."
Under the agreement, Sun will provide up to $100 million in lease financing for the acquisition of the equipment, in exchange for warrants which grant Sun the option to purchase up to $10 million in common stock. Certain conditions also apply; for example, Digital Island must meet certain working capital maintenance and financing milestones. It's as if Sun were financing a business located in a developing country.
And maybe that's the best way for investors to bet on these 'Net enterprises. With its cash position of $5 billion, allowing Sun to make those bets for them may be safer in the long run. During the question-and-answer period, McNealy told the analysts he's willing to wait. "Let the market happen," was his response to one query as to when Sun might begin enjoying a profitable payoff from these investments.
The CEO of a company with 35,000 employees can afford to be patient with a company like Digital Island. After all, Sun shares drifted for several years until they took off from a split-adjusted 10 when the entire Nasdaq market bottomed in October of 1998.
Unfortunately, the new breed of Internet investor goes against the conventional (and McNealy's) investment wisdom, which says don't buy into an IPO unless it's with funds one won't need for the next few years. Digital Island shareholders thought the share price would never stop rising after the company acquired Sandpiper, Inc., a private firm which possesses a technology to route web traffic similar to Akamai (Nasdaq: AKAM). While Sun's shares have taken a hit since the Nasdaq went bearish, Digital Island and Akamai have plunged to a point where, unless another round of dot-com mania sweeps the Nasdaq, a rush to new all-time highs appears to be wishful thinking.
When it comes to considering an investment in Inktomi, the stock hasn't looked back since it went public in June of 1998. It helps to have what is known among Internet investors as "first mover" status. On a split-adjusted basis, the shares have advanced from a low of 42 on its first day to a high on March 20 of 241.50. The company is expected to report a loss of $0.02 after the bell on April 18. Analysts predict this provider of infrastructure caching software will turn profitable in 2001. Having a cash position of nearly $250 million helps its bullish case.
For someone with $10,000 to invest in the Internet's growth, which is running at one percent a day, the best approach is to diversify, with an eye toward accounting for risk. One could use a staggered ratio approach, for example. Put 75 percent toward a no-brainer like Sun Microsystems, 20 percent in a promising young company like Inktomi, and five percent in a wannabe like Digital Island.
Right now, though, the best way to treat $10,000 is by owning two-year treasury notes. But that will change. It always does. |
