Follow the Money
Selling the Net Short
Netcom will probably cut off my e-mail account for doing this, but I'm going to put in a short order this month for the company's stock. The San Jose-based Internet service provider went public December 15, 1994, at US$13 a share, and its stock has skyrocketed to as high as $31.75. While Netcom has substantially overcome its "busy signal" problem and survived Kevin Mitnick's alleged theft of many of its customers' credit-card numbers, there are several reasons to be skeptical about the company's immediate future.
First, Netcom's Internet browser product, NetCruiser, will become increasingly undifferentiated in a market flooded with browser software. Second, Netcom's ISDN access is weak, which is a significant competitive disadvantage. Finally, a consensus opinion of financial insiders is that once the company founders' stock "lockup" is lifted in June 1995, they will be selling their interests off in a big way, which will undoubtedly drive the share price down.
Speaking of shorting stocks, my decision to short Microsoft last month got a boost when a federal judge struck down the company's antitrust settlement with the Justice Department. In his decision, Judge Stanley Sporkin portrayed the accord as too lenient and said it failed to address certain anti-competitive practices which Microsoft states it will continue to employ in the future. This decision raises the possibility of tougher actions against Microsoft and also casts a huge shadow over the company's announced $1.5 billion acquisition of Intuit, the Palo Alto, California, maker of personal and small-business financial software. This threatens to sink the price of Microsoft stock below $60 a share.
"So, have you invested in any private online companies?" I asked Terry Opdendyk, general partner of Onset Ventures, the Palo Alto- and Austin-based $60 million venture fund. We were sitting under a tent, during a lunch break at Demo 95, David Coursey's hot product retreat in Indian Wells, California, attended by 800 entrepreneurs, investors, and corporate strategy types. By lunch on this, the second day, most of the conference attendees had been swept up in the wave of hysteria over emerging opportunities in the online service business. "We've recently looked at about 30 online deals," Opdendyk said, then paused. "And?" I pried. "Well, we figure that the world doesn't need another browser company, and the Oracles and Sybases will most likely capture the Internet-server software market. So, the only real venture opportunity left is to invest in companies that are creating content and using online technology to distribute and sell it," he explained. I think he's a smart man. As Jeff Berg, chairman and CEO of international talent agency powerhouse ICM, disclosed to me recently, "Interactive content creators are sitting at the front of the value chain."
To me, the hottest private company at Demo 95 was the Cupertino, California-based Architext Software, a start-up that, as of this writing, was run by six recent Stanford grads out of a living room. Architext CEO Joe Kraus and chief scientist Graham Spencer had the audience on the edge of their seats as they presented their revolutionary concept-based "search and retrieval engine" that can give any Internet-accessed or proprietary online service a turbocharge in the text-management department.
The company was first discovered by Robert Cringely, InfoWorld's influential columnist and author of the Silicon Valley satire Accidental Empires. He soon had Amanda Hixson, a rising executive in InfoWorld's parent company IDG (International Data Group, a $1 billion trade magazine conglomerate owned by Patrick McGovern) interested in Architext and its ideas. Hixson subsequently hired "the boys" to help work on a secret online project still under wraps. This deal gave Architext the boost it needed to land $500,000 worth of VC money in January from Menlo Park, California-based VCs Kleiner Perkins Caufield & Byers (KPCB) and Institutional Venture Partners (IVP). And, apparently, if they can come up with a decent plan in six months, Architext can expect KPCB and IVP to drop another $1 million into its coffers.
For the Wall Street perspective, I recently had lunch with Lehman Brothers's technology investment bankers Stuart Francis and Mark Dicioccio, whose robust projections for the communications industry bolstered my confidence in the networking company stock picks I made in the TWIT$ portfolio. "We think that up to $250 billion in new equity offerings will be raised over the next five years by telecommunications companies alone," said Francis. This is a huge figure when you consider that Wall Street raised a total of $75 billion in equity offerings in 1994. "Driving this growth will be the privatization of many of the international telco companies, such as Deutsche Telecom, and the rapid expansion of services in Third World countries," explained Dicioccio. Both agreed that these huge institutional cash infusions will trickle down to all the telecommunication service and equipment providers. Hence, I feel good about TWIT$ position in Cisco Systems and inspired enough to buy Applied Digital Access Incorporated and ADC Telecommunications.
The Wired Interactive Technology Fund (TWIT$)CompanyPrimary BusinessSymbolSharesPrice Mar.1down since feb.1ActionBrøderbund SoftwareCD-ROM swBROD110055+6 3/4holdAmerica OnlineOnline networkAMER280082 1/4+28 1/4sellThe 3DO CompanyGames hd/swTHDO30008 7/8-1 5/8hold shortSilicon Graphics Inc.Multimedia hwSGI270035 1/2+4 1/8holdWavefront Technologies Inc.Multimedia swWAVE520015 7/8+3 1/2holdMobile Telecom Technologies Corp.Mobile computingMTEL330022 1/4+ 3/8holdMotorola Inc.Communications/hwMOT160058 1/8-2 5/8holdCisco Systems Inc.ConnectivityCSCO250032 15/16-1 1/3holdMicrosoft Corp.SoftwareMSFT50063 1/4+4 1/8hold shortApple Computer Inc.Hw/swAAPL600040- 1/8holdOracle Systems CorporationDatabase swORCL600031 1/4- 11 1/8holdNew StocksNETCOM Online Comm.Service Inc.Internet providerNETC3000027 1/2shortApplied Digital AccessDigital access networkADAX400028buyADC TelecommunicationsDigital access networkADCT400029 1/2buyPortfolio Value $1,156,000.00 (+15.60% overall) 4.04%Legend: This fund started with US$1 million on Dec. 1,1994. We are trading on a monthly basis, so profits and losses will be reflected monthly,and profits reinvested in the fund or new stocks.Anthony B. Perkins (kids@netcom.com) is publisher and editor in chief of The Red Herring*, a monthly investment magazine published in San Francisco.*
