Invest Along With Microsoft?

Even though most market indices are down lately, the tech-laden NASDAQ composite has been moving up. The largest NASDAQ stock by market capitalization is Microsoft, and it reached a new high of 134.

Microsoft announced this week that it is investing $200 million in Qwest (QWST). Qwest is a new phone company building a fully up to date fiber network based on Internet protocols. It does not have the baggage of the older phone companies, which have a large installed base of old technology.

The fundamentals of Qwest are this: little or no earnings most quarters, a huge writeoff in the second quarter of this year, price/sales ratio of 6 and a half. Well, for an Internet company these would be good, but for a phone company, not so good. That raises an interesting question - is Qwest a phone company or an Internet company? I think the answer is that these two things are merging and Qwest is well positioned to grab an increasing share of this huge market.

Is investing along with Microsoft a good idea? Look at the records of Microsoft's recent investments in public companies:

The Realnetwork stake was bought before the stock went public (the company was then called Progressive) at around $18 a share, and was sold starting last month. The other two investments were in public companies and Microsoft still holds these stakes. You will notice that the gains are impressive. Sure, the market has gone up since the summer of 1997, but the gain on the S&P 500 is under 30%. My take on this is, yes, investing along with Microsoft makes sense. Bill Gates is in a much better position to evaulate the prospects of high tech companies than you or I. To be sure, these deals are more than simple investments. Microsoft generally gets other benefits in larger deals of which the investment is just a part. But the investment part still has to make sense and it does. So consider Qwest, which closed today at 43 1/2.