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To: Glenn D. Rudolph who wrote (60803)	6/6/1999 7:02:00 AM
From: Mark Fowler	Read Replies (1) \| Respond to of 164684

report He favors the larger companies because "they tend to get stronger." "The strong get stronger, more powerful and have higher profit margins. Companies like Cisco and Microsoft have control over the pricing power of their products and have terrific margins to show for it. Those are the kind of businesses we like to own now and in the future," says Malcolm. He does not like to invest in commodity type products that have little or no pricing power. Those types of companies include; semiconductor, DRAM manufacturers and other related areas that he feels have little or no pricing power in their products. Malcolm notes there are 2 types of Internet companies, those that are the leaders and have not reached full potential and those that are 2nd and 3rd tier players, which may be overvalued. "The leaders in this space will garner a disproportionate share of the market and the profits." He states, "What we have seen recently in the Internet space is no different than any other business cycle that we have seen in the past. The first phase of a new business cycle in the Internet space brings about a large number of new businesses, all competing for a top position in their space. The second phase is the consolidation phase, which we are seeing now. For instance, AOL's purchase of Netscape or Yahoo!'s purchase of Broadcast.com. At this point in time, you will start to see the new leaders emerge. The ones that emerge are the ones that acquire other businesses. We want to be invested in these blue-chip leaders of the Internet." He compares Yahoo's! profitability to that of Microsoft's One of Malcolm's favorite Internet stocks is Yahoo!, which traded as high as $244 in early April and is now under $150. He compares Yahoo's! profitability to that of Microsoft's, which has gross margins of 90% and net margins of 48% (as of last quarter). That means Microsoft keeps $0.48 for every dollar that comes in. Yahoo! has comparable margins that include gross margins of 90% and net margins of 38%. "That makes Yahoo! one of the most profitable businesses in the world and we like to own businesses like that." He adds, they have a strong balance sheet with little debt, $600 million in cash and one of the largest market shares in terms of eyeballs, with around 60 million users world wide. Malcolm compares traditional media ads on television and the ones viewed on the Internet. He argues that there are high production costs that go into making a TV commercial, and the margins for those traditional media companies are very low. For an Internet ad or the ones that appear on Yahoo!, there is not much production costs and, as a result, they have very high margins. Another area that he feels Yahoo! has a strong grip on is their e-tail area. "Yahoo! receives a cut of the e-tail business that flows through their domain. That also is a high margin business." Based on his figures of future cash flows, he thinks Yahoo! today is worth $300 per share.