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)
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.

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


pro forma IPO


Shares offered


Price target/actual




Shares out



IPO market cap


less working cap


plus LTD


Enterprise value


1999 Revenues


1999 Losses


Annualized rev.



Cobalt Networks


Revenue multiple


Rev. multiple enterprise


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