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Technology Stocks : Dell Technologies Inc. -- Ignore unavailable to you. Want to Upgrade?

To: jhg_in_kc who wrote (50363)	7/9/1998 1:53:00 PM
From: Chuzzlewit	Read Replies (1) \| Respond to of 176387

Welcome to the thread jhg, On valuing intangibles: If I had a black box that cranked out $1000 per year and offered it for sale, only a madman would insist on basing his offering price on the cost to build the box. The lesson from this analogy is that the generation of future cash flows is the only material parameter; thus I believe a business is worth only the value of its future cash flows. The corollary is that the method of deriving those cash flows is totally immaterial. My problem with the internet gateway stocks like Yahoo! is that I have no reasonable way of estimating what the future may bring. I view these companies as electronic magazines whose incomes are derived from advertizers. Thus, the question is which magazine has the format most likely to appeal to readers. The more readers, the higher the advertisers' rates. This is really nothing more nor less than an interactive form of broadcasting. But since I have no idea of potential cash flows, and I have no idea of how these companies can establish a "franchise" I avoid investing in them. On the other hand, companies that sell using the internet are much more interesting to me. I own two such companies -- BKS and DELL. The allure of such companies should be obvious. They will make the decisions as to which gateways (Yahoo!, Excite etc.) are the best advertising vehicles and act accordingly. But in addition, they are able to eliminate substantial selling costs in the process. This triggers real synergies (and here I use the term in a more exact sense than is generally bandied about). For example, BKS would be hard pressed to sell to the electronic retail customer were it not for the fact that retail store outlets exist. A retail customer needs to have a hands on feeling for what he is buying and from whom. So the existence of retail outlets provides a feeling of substance to the customer. In the case of Dell, this necessity has been obviated by the wide use of Dell machines world-wide. Here, the "synergy" is really the critical mass. So, what os an investor to do if he believed that competitors such as Compaq and HP were able to breach the chasm of direct sales? I believe that I would look for greener pastures. Not because Dell is a bad company, but because I invested in Dell with growth specifically in mind. And a successful imitator profoundly compromises future growth. You said I believe Dell's "franchise" to use a Buffet-associated term or "barrier to entry" in a general sense is its business model efficiencies. I couldn't agree more! But note the distinction between Dell and Coca Cola. In the former case we have products that are rapidly evolving, while in the latter we have a static product. In the former case we have a commodity (I don't use this in the pejorative sense), while in the later case we have clear brand differentiation which leads consumers to form strong brand preferences which don't exist in the computer market (except for Apple and similar computers). This means that DELL is in a much more dynamic and precarious position than KO. In other words, the rewards are much higher, but so are the risks. Chuzzlewit is the family name of a Dickens novel "Martin Chuzzlewit". Chuzzlewit is also ambiguous because the young Marin Chuzzlewit was a naive and painfully honest young man, while the elder Chuzzlewit was a cynical and scroundrely character. Chuzzlewit is also the name of my alter-ego a certain very savvy stock-picking Birman pussycat. Actually, he does all the thinking and I just do the typing. So "CTC" means Chuzzlewit the Cat. TTFN, CTC