Rule Breaker Portfolio

What Happened to Fool Port?

Excite, Netscape, and Market Caps
Plus, where Internet value will migrate

By David Gardner (

Alexandria, VA (Jan. 19, 1999) -- The Rule Breaker Portfolio rose 2.13% today, easily o'erleaping the S&P 500's 0.70% gain, but getting dunked on by the Nasdaq and its 2.55% dipsy-do. Our @Home skyrocketed $13 3/8 to lead the way, with some nice supporting roles played by AT&T (up $7 1/8), Lucent (up $3 7/8), AOL (up $3 5/16), and Amgen (up $2 3/8). But weakness in our Dow stocks and an unparticipatory demonstrated that we need to keep practicing our foul shots.

The news of the day is certainly @Home's (Nasdaq: ATHM) statement of intention to acquire Excite (Nasdaq: XCIT), a pure stock transaction ("here's mine -- you give me all of yours") initially worth $6.7 billion.

Interesting, isn't that? I love to look at market caps.

In fact, financial papers would do their readers more of a service by reporting on market cap at least as much as share price or earnings. Typical financial coverage refers only to a company's current price per share, or what its earnings will be. But for non-biz-savvy readers, these things don't mean much. I mean, what does a stock priced at $72 a share mean, huh? Or what will the guy scooping ice cream down at Ben & Jerry's care about his company having reported 81 cents in earnings per share over the trailing 12 months?

BUT, tell the people instead about market cap, and the world perks up, moves closer to the edge of its seat. For any newcomers, market cap is simply the value of the company, its price tag. How does one obtain that? Multiply the price per share that you see online or in the papers by the number of shares outstanding. For Ben & Jerry's (Nasdaq: BJICA), for instance, that computes to...

... well, what do you think? How much would YOU pay for a profitable ice cream company with a well-known brand name and $202 million in trailing 12-month sales? While you take a moment to guess, let me do the math for you.

Ben and Jerry's closed today -- on lowly volume of just 13,600 shares -- at $23 1/16. If you check the most recent quarterly report, you'll find the Vermont-based concern has 7.45 million shares outstanding (fully diluted). That means that Ben & Jerry's market cap -- the price of this company, its total value -- is just $171.8 million. That is, in fact, below its annual sales total, indicating a low-margin company (net profit margin of about 3% -- still, given the brand name, I think Ben & Jerry's looks cheap).

BUT, I digress... for a good reason, I hope. I think the average American is much better informed knowing that Ben & Jerry's is worth $172 million, rather than that its stock is $23 1/6, or its earnings are 81 cents per share. Once you know the worth of Ben & Jerry's, you have a handle on it. You can go on to compare it to numerous other retail businesses, or to direct competitors, and acquire further context.

Back to tonight's focus: That's why the contexts of @Home/Excite and AOL/Netscape interest me. When AOL announced it would buy Netscape (stock for stock, exchanging 0.45 shares of AOL for each share of Netscape), the deal was worth $4.2 billion. After several weeks of big AOL gains, at the market's closing price today Netscape is being valued at $6.74 billion. Interestingly enough, that's very similar to the price tag that @Home put on Excite... before the day's trading, that is. Now it's more like $7.5 billion.

Ain't that somethin'! Excite is worth more than Netscape -- at least in @Home's (and the market's) eyes. Essentially, one of the top two search engines is worth more than one of the top two Web browsers. I have to say I'm not surprised. A search engine offers personalized service for several million people who click ads and generate revenues every day. A browser offers service for hundreds of millions, but it's generalized service, it's mostly free, and the provider isn't getting any ongoing ad clicks.

I remember more than three years ago (10/25/95), when I wrote this portfolio recap about Netscape vs. AOL. Indulge me because it's a must-read, just for perspective's sake. First off, Netscape was worth $3.3 billion that day, and how much do you think AOL was worth? (Remember the beauty of talking in market caps, here.) Answer: $2.6 billion. That's right, Netscape was worth more than AOL, and to my credit (why do you think I'm pointing to this piece of writing?!) I stated my belief that this was topsy-turvy -- why would the market be paying 33 times sales for Netscape and just 3 times sales for AOL? Seemed off. And it was.

The more I look over that report, the funnier some things are. For one, Ride Snowboard was our hot growth stock at the time, though today it barely exists. Iomega hadn't yet made its big move, though it was up 64% since being purchased five months earlier. And today, even after coming way down from its all-time high, Iomega is up 640% -- ten times higher. AOL's ticker was AMER back then, though it was still our best stock. It was up 395%, whereas at market close today the gain was 8149%. Netscape, on the other hand, didn't gain much market value at all in the intervening period, before AOL announced its buyout, that is. How about that, though? AOL today buying out that company for a fraction of AOL's own market cap, a company that it was worth just a fraction of, a few years before.

What I believe you're seeing with the passage of time is a natural evolution in Internet value, one we've pointed out in the past. In the beginning, the value went to the companies that made the tools and "apps," the stuff that got you on to the Internet. Netscape and its Web browser were one example. The next stage is the companies that provide sites that use those very tools to bring together and organize information -- AOL and Yahoo are examples. These are the companies that bring millions of people into a medium, what the tools companies could never do -- and yet without the tools companies, these companies would not exist.

Looking ahead, I believe the third stage will ultimately ascribe value to those companies whose brand names represent "category killers" across major subjects. This means "destinations," not "portals." A portal is a door to the world. The destination is what many people step through portals to get to. A good example there is, say,, which is the category killer for sports. Once you get used to, you don't need any other sports site and you don't really need any portal to point you there. You've found something you love, a "place" you can "live," and you will be a lifelong customer.

Take a spot-on analogy to close, looking at publishing. In the beginning, the value went to the companies that made books, the few powerhouses that had the technology to cut the paper, print with ink, and bind and manufacture the books. Next would be the publishers and retailers, the middlemen who in a sense brought together and organized that information (just like step two above, with AOL and Yahoo).

But in the end, once these things become commodities, it's all the point of view. The value lies in the author, the creator, the real brand name. It is the content and the brand that are the final distinguishers and value creators.

With @Home's acquisition of Excite, we find we're still in stage two, which is where many Rule Breakers live (they broke the Rules of the first stage). Eventually, the Rule-Breaking investor will be well served to look ahead into stage three, where she will find the content companies, the points-of-view, the category killers, the destination. That's the endgame.

Meanwhile, we'll enjoy doubling our money in @Home!

To close tonight, I want to give a shout out of pure joy and thanks to the more than 1000 Fools who contributed to the amazing success of our Fool Charity Fund. As this morning's press release reveals, we set a new record, raising just shy of $200,000 as a community that wants to give something of its prosperity back, sharing our strength with those who feel the pain -- and it is pain -- of hunger. This is a credit to each of you, and a credit to us all.

Fool on, Fools!

01/19/99 Close
Stock  Change    Bid 
AMZN  -  9/16 139.81
AMGN  +2 3/8  111.25
AOL   +3 5/16 149.94
T     +7 1/8   91.38
ATHM  +13 3/8 115.38
DJT   +  3/16   4.44
DD    -  11/16 55.94
XON     ---    71.06
IP    -1 5/8   43.38
IOM   +  9/16   9.56
LU    +3 7/8  114.06
SBUX  +1 1/2   54.00
TDFX  +  5/8   13.00

                   Day   Month    Year  History  Annualized 
      R-BREAKER  +2.13%  12.42%  12.42% 1028.35%  72.23%
        S&P:     +0.70%   1.85%   1.85%  185.83%   26.57%
        NASDAQ:  +2.55%   9.83%   9.83%  234.38%   31.10%
 Note:  Yearly, historical and annualized returns for the 
S&P include dividends

    Rec'd    #  Security     In At       Now      Change
   8/5/94  1100 AmOnline       1.82    149.94    8148.75%
   9/9/97  1320     6.58    139.81    2025.05%
  5/17/95  1960 Iomega Cor     1.28      9.56     646.83%
  10/1/96    84 LucentTech    23.81    114.06     379.09%
  8/12/96   130 AT&T          39.58     91.38     130.87%
  12/4/98   450 @Home Corp    56.08    115.38     105.73%
  4/30/97 -1170*Trump*         8.47      4.44      47.60%
 12/16/98   290 Amgen         85.75    111.25      29.74%
  2/20/98   200 Exxon         64.09     71.06      10.88%
   7/2/98   235 Starbucks     55.91     54.00      -3.41%
  2/20/98   215 DuPont        59.83     55.94      -6.51%
  2/20/98   270 Int'l Pape    47.69     43.38      -9.05%
   1/8/98   425 3Dfx          25.67     13.00     -49.35%

    Rec'd    #  Security     In At     Value      Change
   9/9/97  1320  8684.60 184552.50  $175867.90
   8/5/94  1100 AmOnline    1999.47 164931.25  $162931.78
  12/4/98   450 @Home Corp 25236.13  51918.75   $26682.62
  5/17/95  1960 Iomega Cor  2509.60  18742.50   $16232.90
  10/1/96    84 LucentTech  1999.88   9581.25    $7581.37
 12/16/98   290 Amgen      24867.50  32262.50    $7395.00
  8/12/96   130 AT&T        5145.11  11878.75    $6733.64
  4/30/97 -1170*Trump*     -9908.50  -5191.88    $4716.63
  2/20/98   200 Exxon      12818.00  14212.50    $1394.50
   7/2/98   235 Starbucks  13138.63  12690.00    -$448.63
  2/20/98   215 DuPont     12864.25  12026.56    -$837.69
  2/20/98   270 Int'l Pape 12876.75  11711.25   -$1165.50
   1/8/98   425 3Dfx       10908.63   5525.00   -$5383.63

                              CASH  $39332.55
                             TOTAL $564173.49 


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