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Many-To-One: Total ISDEX Market Cap Equals Microsoft

On any given day, depending on the adrenaline levels of Wall Street, the ISDEX total market cap and that of Microsoft trade at similar levels, about $400 billion. Our analysis shows that ISDEX represents 95% of the market capitalization of the Internet stock universe, and yet these 50 companies are valued on par with just one PC stock.

If we take away Cisco's $162 billion contribution to ISDEX, another interesting thing occurs--the 49 other stocks in the index trade at 62% of Bill Gate's software machine.

While we agree that hype and overvaluation may be part of the overexposed brand names in the Web space, the comparison raises questions about the nature of valuation once again.

The key difference is Microsoft's obvious dominance of the desktop, giving it huge sales and strong earnings that consistently beat the Street, not to mention its leverage across media, technology, and finance circles that its cash horde provides. Many firms on the ISDEX may never see that kind of staying power. But some could.

Let's see the chart:

ISDEX Stock Market
component ticker capitalization
company symbol (millions)
Amazon.com AMZN $ 18,233
AOL AOL $ 82,190
@Home ATHM $ 13,306
AXENT AXNT $ 914
Broadcast.com BCST $ 2,684
Broadcom BRCM $ 5,771
Broadvision BVSN $ 1,026
Beyond.com BYND $ 730
CDnow CDNW $ 301
Checkpoint CHKPF $ 1,428
CMGI CMGI $ 5,425
Concentric Networks CNCX $ 664
CNET CNET $ 2,107
Cyberian Outpost COOL $ 365
Cisco CSCO $ 162,500
CyberCash CYCH $ 223
Doubleclick DCLK $ 1,864
eBay EBAY $ 11,380
Egghead.com EGGS $ 431
ETRADE EGRP $ 5,376
Earthlink ELNK $ 2,029
Exodus EXDS $ 1,649
GeoCities GCTY $ 3,079
IDT IDTC $ 292
Inktomi INKT $ 3,197
ISS Group ISSX $ 1,023
Lycos LCOS $ 4,037
Mindspring MSPG $ 2,586
Network Associates NETA $ 6,619
Netscape NSCP $ 8,032
Network Solutions NSOL $ 2,725
N2K NTKI $ 187
Open Market OMKT $ 466
Onsale ONSL $ 662
Open Text OTEXF $ 485
PSINet PSIX $ 1,872
Preview Travel PTVL $ 273
RealNetworks RNWK $ 2,097
Security Dynamics SDTI $ 782
Infoseek SEEK $ 4,346
Security First   $ 654
Sportsline USA SPLN $ 817
Spyglass SPYG $ 167
24/7 Media TFSM $ 410
USWeb USWB $ 1,569
Vocaltec VOCLF $ 135
Verio VRIO $ 922
Verisign VRSN $ 2,634
Excite XCIT $ 5,511
YAHOO YHOO $ 30,175
  TOTAL $ 406,350
  AVERAGE $ 8,127
     
Microsoft MSFT $ 392,200
     
Percent difference    
ISDEX vs. MSFT   4%
data: Market Guide

Between AOL (NYSE:AOL), Amazon.com (NASDAQ:AMZN), eBay (NASDAQ:EBAY), Netscape (NASDAQ:NSCP), and Yahoo (NASDAQ:YHOO), any one of these five companies may someday have the kind of leverage Microsoft enjoys today.

Consolidation looks like it's creating a mega-power to battle Microsoft. Our belief is that AOL could be the real "next Microsoft" as it works across its AOL online, AOL.com, ICQ instant messaging, and completes its pending merger with Netscape.

AOL's revenue is expanding into the gorilla stage, and no other Internet company (except Cisco) comes close.

For the six months ended December 1998, AOL's total revenues were $1.82 billion, up 63%. Net income soared from $64 million to $228 million. We project AOL revenues will exceed $5 billion annually, which is a fraction of Microsoft's nearly $18 billion annualized revenue. In 3 to 5 years this could be a different story.

Across its various platforms AOL commands an installed user base that begins to rival that of Microsoft, in the 40 million to 50 million user range, although Microsoft reaches about double that with all its applications and OS.

Besides AOL, the 50 companies in ISDEX together account for a combined reach of customers and users that far exceeds that of Microsoft on the Web and on the Internet. These firms have more sway than anything yet to come from Redmond.

Even with Microsoft's Internet Explorer browser, we think the browser is a commodity, a shell; the value shift has gone from software to the companies that provide the links, services, and scale.

Note the top market cap leaders in ISDEX (those mentioned above) all are service oriented, delivering goods or content. None of them are software companies. Even AOL doesn't sell its software, it gives it away to sell the service.

This comparison is not a Microsoft-bashing exercise, however, since we also see Microsoft making headway in the Internet space with MSN, Expedia, and CarPoint. It simply demonstrates how these 50 Internet pioneer companies trade on par with just one PC-era born company. It's worth pondering.