The Four Horsemen of Web 2.0

|
Includes: AAPL, AMD, CSCO, DELL, DVMT, GOOG, HPQ, INTC, JAVA, MSFT, ORCL
by: Andrew Schmitt

Cisco (NASDAQ:CSCO), Oracle (NASDAQ:ORCL), Sun (NASDAQ:SUNW), and EMC (EMC) were the darlings of the internet boom and were referred to as the ‘Four Horsemen‘. Your broker was overheard in 2000 “Yes, things are in fact a bit irrational but these companies have real products, revenues, and earnings and are investment-grade leaders of the new economy.”

Your broker neglected to mention that the biblical Four Horsemen of the Apocalypse were steered by four riders - Conqueror, War, Famine and Death. I’ll leave it to my readers to pair them appropriately.

Today, I like to refer to Google (NASDAQ:GOOG), Apple (NASDAQ:AAPL), HP (NYSE:HPQ), and AMD (NYSE:AMD) as the new Four Horsemen of Web 2.0. Reading and listening to the media chatter about these companies induces an uncomfortable dot-com deja vu.

Bill Gates, CEO of Microsoft (NASDAQ:MSFT) and Paul Ottellini, CEO of Intel Corp. (NASDAQ:INTC) co-wrote an editorial in yesterday’s WSJ (sub. required). Clearly they are appealing to those who have fled their equities for the promises of Web 2.0.

Recently, we’ve read on the pages of The Wall Street Journal that we’ve reached the end of the personal computer era and that the open, broad industry approach that has enabled today’s rich computing experiences doesn’t apply to the world of digital devices.

The reality is a little different. The truth is that the model which has fueled the incredible popularity and affordability of the PC will continue to drive innovation and choice in the burgeoning area of personal devices such as cell phones, digital players and mobile PCs. As such, the PC is becoming more important and popular as a key enabler for these new digital scenarios in every corner of the world, from Indianapolis to Istanbul. If anything, it is, to paraphrase Churchill, perhaps the end of the beginning…

Gates and Otellini have a very valid point. While MP3 players, digital cameras, phones, and web based applications have stolen the show in the marketplace, all of them still rely on the PC as a digital hub. Nothing has emerged that will replace it. The only threat is the ‘thin-client’ web based application model, an idea that gets trotted out every few years and then is subsequently put back in the barn.

In addition to Intel and Microsoft, two other big-cap companies that have suffered as a result of this shift in perception are Dell Inc. (NASDAQ:DELL) and Yahoo! Inc. (NASDAQ:YHOO).

Competitively, all four of these companies are still forces to be reckoned with.

* Yahoo earned more money than Google in the trailing twelve months from a more diversified business model.

* Dell’s supply chain for electronics rivals Wal Mart’s (NYSE:WMT) in terms of efficiency and they will eventually succeed in their efforts to commoditize the consumer electronics space. The current market’s perception that PCs are anything but commodities is a brief vacation from reality, and Dell is the best commodity producer out there. I believe the cost structure of Dell’s supply chain and web retailing model will beat HP’s.

* Intel will rip the throat out of AMD with their new low power designs for servers. They have a much bigger capital base to borrow from to build next generation fabs if (when?) money becomes more expensive. Otellini realizes the company has become too free-spending. AMD isn’t going away but the earnings multiple gap between the two is absurd.

* Microsoft has been cornered before and recovered. The Vista upgrade cycle will re-energize the cash machine. Over half of all Smartphones now run Windows Mobile 5.0 (Yes, more than Blackberry and Palm combined). Xbox 360 is looking to take share from Sony and has the best online service hands down. Meanwhile, Apple trundles along with a 5% market share in PC’s and 1/4th the valuation of Microsoft.

This is what the market cap vs. P/E multiple relationship looks like.

While the new ‘Four Horsemen’ may be the preferred growth engines of Web 2.0, I think these four out-of-favor companies represent a better investment vehicle for the next five years. Those with more exotic tastes can hedge by selling AMD, AAPL, HPQ, GOOG short while going long INTC, MSFT, DELL, and YHOO. This is a more market neutral strategy.

Inspiration and some data: USA TODAY