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e-letter Friday: The $100B Question

Dear Lou:

Congrats on the news February 4 on the IBM's PC chip that broke the 1,000 MHz or 1 billion cycles per second barrier. That makes a Pentium 2 look like a go-cart at the Indy 500.

Incredible. Forget Moore's Law, here's Lou's law: Take the existing chip speed and triple it, making silicon move in ways that even Bill Gates hasn't created software for yet.

Yes, we saw the rumor about IBM (NYSE:IBM) being a possible suitor for Netscape (NASDAQ:NSCP). In fact we suggested it a month ago. It will take deep pockets to build out the potential of what Netscape has created. Who will win, Netscape's couple thousand technowizards or Microsoft's 20,000? A company with $5 billion cash vs. one with heavy fourth quarter losses?

Which brings us to the illogical world of Wall Street and our latest tweaking of the abacus. How is it that Microsoft (NASDAQ:MSFT) trades at more than 50x earnings while "Big Blue" trades at just 16x? May very well be the floating point error in those Pentiums they're using in the financial district. It happens. Or maybe it's IBM's time to rock the boat.

MSFT market cap sits at almost TWICE IBM's, despite the fact that IBM sales for the fourth quarter of 1997 alone surpassed Microsoft's entire 1997 sales. $23.7 billion. IBM 1997 earnings were the better part of Microsoft's entire year sales.

Net earnings for the 12 months ended December 31, 1997 were $6.1 billion, or a record $6.18 per common share. For record sake let's mention the $78.5 billion sales for last year, up 1%, but 1% is a lot when we're talking about $78 billion.

We peaked at Microsoft's latest quarterly results, which were released January 21 when Microsoft reported net income of $1.13 billion and earnings per share of $0.85 for the quarter ended December 31, 1997, a 49% increase over the $0.57 earnings per share reported for the same period last year.

Revenues totaled $3.59 billion, a 34% increase over the $2.68 billion during the same quarter last year. A Zen of one hand clapping award is in the mail to Steve Ballmer.

Here's the snapshot of Big Blue and Big Blue Yonder:

IBM vs. Microsoft

  IBM Microsoft % difference
Market cap (millions) $ 96,792 $ 187,600 94%
Price/earnings 16.36 53.34 226%
Feb 5 close $ 99.56 $ 155.44 56%
52-week high $ 113.50 $ 158.00 39%
52-week low $ 63.56 $ 87.50 38%
© 1998 Mecklermedia      

So with the 1,000 MHz chip will Intel (NASDAQ:INTC) be your latest target? We expect Compaq, DELL, Gateway, and more than a few others may be interested in the speed. No doubt Lotus Notes on a silicon Ferrari may be an entirely different animal.

Of course, the bottleneck remains with the telcos that insist on squeezing every last ounce of juice from 100-year-old copper wire that often can't even handle 33.6 modem speeds. What good is 1,000 MHz if data trickles in?

Corporate sell-through is much stronger and where IBM really has the hardware/service combo. We think service could be the biggest growth area in computing since networking is taking over the functions of corporations entirely. Everything from accounting to research to e-mail. And the pipes are fatter with ethernet, etc.

Notes on its own may not be lively enough to take on the server/browser duo freebie that Microsoft flings out with its NT sales. Groupware (gropeware), e-mail, content, whiteboarding, all are bundled into Microsoft's ever-expanding universe. Netscape has a presence with many rival products with good inroads in some areas, though not others.

Related point, Compaq's buy of Digital certainly shakes things up also. So we put these elements into the emerging picture called "Internet computing" and came up with this if-then-else statement: If IBM acquires HP (NASDAQ:HWP), then it gains a big footprint in PC servers and big kahuna machines, followed by a Netscape/Novell software double up to keep the machinery humming.

Else IBM innovates while sleeping Wall Street understates, $100 billion less market cap than Microsoft, makes zero sense.