RealTime IT News

E-Mailbag Monday: The Dow Gets Cool, Stamps.com, Cobalt Networks

Over the weekend, Tom's readers e-mailed him with questions regarding the addition of Microsoft and Intel to the Dow,the status of Stamps.com and Cobalt Networks.

Hi Tom:

As you know, this week Microsoft (MSFT) and Intel (INTC) were added to the Dow. What does this mean to investors?

Reply: First of all, keep in mind that the Dow Jones Industrial Average (DJIA) measures the performance of a market on a price-weighted basis. In simplistic terms, you calculate it by adding the value of all the stocks and then dividing this by the number of shares in the index. However, the divisor is not 30; rather, it is much less, because of the many splits that the stocks have undergone.

Other indexes are based on market capitalization (such as the S&P 500). So, a stock like Microsoft, which has a market capitalization of $475 billion, would have a much higher weight than say, Priceline.com Inc. (PCLN), which has a market capitalization of $8.7 billion.

There are two major criticisms of the DJIA approach. First of all, because there are only 30 stocks in the Index, one stock can have a disproportionate impact. An example is in 1939, when IBM was replaced by AT&T. If this did not occur, the DJIA would have reached 1017.39 in 1961, instead of 734.91.

Next, since the DJIA is price-weighted, those stocks with high price swings have a disproportionate impact on the Index. This is definitely the case with Intel and Microsoft, which ordinarily have wide price swings on a daily basis.

Thus, assuming Intel and Microsoft continue to grow strongly (and this seems to be a fairly safe assumption), these stocks will likely juice the performance of the DJIA over the long-term.

Stamping on the Competition

Several weeks ago you wrote a column on Stamps.com (Stamps.com: The Check Is In the Mail). This week the company bought iShip. What does this mean for the company?

Reply: There's a famous story about railroad companies. They faltered because they considered themselves in the railroad business, not the transportation business. Well, it looks like Stamps.com (STMP) is not making this mistake. The company is not in the stamp business; it's in the shipping business.

Now, when you go to Stamps.com, you can not only download postage stamps, but also compare rates among shippers (such as FedEx, UPS and so on), track packages and arrange for package pick-ups. Interestingly enough, iShip has a strategic agreement to provide shipping services to eBay (eBay is also an investor), as well as with Mail Boxes Etc.

To look at market potential, the postage market is $60 billion per year and the shipping package business is also $60 billion per year.

Stamps.com was the first in its space to go public, as well as to get approval to sell stamps online. What's more, the Stamps.com technology is much easier for consumers to use compared to the E-Stamp solution (special hardware is required for E-Stamp).

This Week's IPO Blowout?

Will Cobalt be the next big IPO? It has Goldman Sachs as the underwriter and is a Linux provider.

Reply: You're right. In fact, this may be the biggest IPO for the week. One of the hottest IPOs this year was RedHat (RHAT). The stock was priced at $14 on August 11, 1999 and is now selling for $88 5/8.

Actually, Cobalt Networks uses a modified version of the RedHat Linux operating system to make so-called server appliances. For many companies, traditional server solutions are too expensive and not flexible.

Cobalt changes this, as the price points are quite low (after all, the underlying operating system is free) and the code is open source. Further, the technology is easy to use, so there is usually no need for having a full-time IT staff.

The market for Cobalt products is expected to be very large. According to Dataquest, the market should grow from $2.2 billion in 1999 to $15.8 billion by 2002.

So far, Cobalt has sold 17,000 server appliances to more than 1,200 customers in 65 countries.

Here are the valuation metrics:

Cobalt Networks

COBT

pro forma IPO

 
   

Shares offered

5.00

Price target/actual

$16.00

Proceeds

$80.00

Shares out

30.8

   

IPO market cap

$492.80

less working cap

$88.50

plus LTD

0

Enterprise value

$404.30

1999 Revenues

$13.80

1999 Losses

$13.70

Annualized rev.

$27.60

   

Cobalt Networks

 

Revenue multiple

18

Rev. multiple enterprise

15


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