<THE RULE BREAKER PORTFOLIO>
Amazon vs. eBay?
What's the fight about? Plus, Starbucks
by Jeff Fischer([email protected])
ALEXANDRIA, VA (April 5, 1999) -- The Rule Breaker continued its record-making ascent, adding 7.7% or $65,000 today -- 30% more than the portfolio's 1994 starting value of $50,000. Investing in more than a half dozen losers over the past four years and just a few large winners has resulted in a total return of 1,638%, against the S&P at 201%, and has grown $50,000 into $869,443.00.
"Wow. Impressive! It must have taken great effort!"
"Well," -- shuffling feet -- "actually, no. Of course not."
Foolish investing involves buying companies that you know or use (AOL, Amazon, Iomega) and holding on as they grow, and grow... and grow. Sometimes you hold on too long (as with Iomega, perhaps) but the successful investments that you continue to hold will crush your mistakes into insignificance over the years. Incidentally, this young year we've had great successes. The top-five performing stocks on the market in the first quarter of 1999 included three Rule Breakers: @Home, America Online, and eBay. We call the results "The Rule Breaker Sweep."
In five years, leading Internet companies could very likely have higher valuations. We've been saying that for at least the past three years, and will probably say it again in 2004: "In five years, leaders could likely have higher valuations." The medium is growing so quickly and offers so much opportunity that, rather than popping like a bubble, demand for the medium's leading stocks is growing. In fact, mutual funds devoted to Internet-related companies are now proliferating like rabbits. The new funds (which are just beginning to emerge) in turn create higher prices for the leading stocks.
Surprising, isn't all of this?
Our last column in 1998 addressed surprises. Rule-Breaking companies frequently surprise investors. Those most likely to surprise us in 1999 -- we wrote on December 31 -- are Amazon, AOL, @Home, and Starbucks. Amgen should have been on our list, too, while we didn't yet own eBay.
The early leader in the category of "Surprise Us, Baby!" is Amazon.com (Nasdaq: AMZN). The announcement last week of its auction service took almost everyone by surprise and -- as a positive surprise can do -- it sent the stock soaring. Amazon has gained $37 since the news, or 25%. On the flipside, eBay (Nasdaq: EBAY) initially lost $15 before rebounding $10 today. Investors are worried about the implications for eBay. Amazon is trying to get its 8 million customers to use its auction service, but just as we wouldn't sell Amazon if AOL opened a bookstore and aggressively advertised it to its 17 million users, we won't be selling eBay anytime soon.
First, this most likely won't be a win-lose situation. Both companies are poised to win something. Amazon has enough critical mass that its auction service, given time, should be a success. eBay has enough of a lead in the auction market that it should continue to grow aggressively and profitably. When Amazon announced its auction service eBay had 1.78 million items for sale on its site. As of this weekend, that number had grown to 1.81 million (now it says 1.79 million). Amazon is beginning with 10,000 items. eBay should continue to grow rapidly enough to stay ahead of Amazon, even though Amazon will grow much more quickly on a percentage basis. In the long run, both auction services could easily prosper. The market is large enough because the market is incredibly non-specific.
In fact (this might sound counterintuitive and even stupid), Amazon's auction service might actually help eBay on many levels. How so? Because millions of Amazon's users have never utilized an auction service on the Web. But under the coercion of Amazon, they'll begin to investigate the prospect and eventually, if they have an interest in acquiring anything they see, they'll begin to use Amazon auctions. Once you begin to use auctions, you typically begin to wonder if the items you seek are being sold on other auction services, too. Logically, many new Amazon auction users (if they become active) will eventually search for items at the leader in auctions, too -- eBay.
In the end, Amazon will most likely do for the auction market what it has done for the book market: it will expand the size of the actual market.
When using an auction site, a person usually looks for something specific and difficult to find, or collects collectibles, or browses just to see what catches their interest. Given this, it's hard to prefer one leading auction service over another. It's more likely that, as habits develop, auction-interested people will frequent the leading few auction sites on the Web.
I was an eBay user before Amazon's auction service. Now, already, I find myself using both sites. If I see an item on Amazon that I haven't searched for on eBay, I'll check to find the item on eBay and see how the auction prices differ. Likewise in reverse. It's easy to flip back and forth. And unlike retail product sales, prices are not the primary deciding factor in where to buy from: the item is. Because these two auction companies (eBay and Amazon) don't compete by selling similar or identical products at set prices, it's unlikely that they'll compete for buyers loyalty much at all. Instead -- and if they're smart they might work this out formally -- they'll share the bulk of the Internet's auction-loving traffic as it searches for thousands of different items at both sites.
The more important issue involves sellers. Sellers will gravitate toward the site that typically fetches the highest price for particular items. Even after one week, I've found that rare or first edition books on Amazon are fetching considerably higher prices than the same books on eBay. Apparently there's more concentrated demand for books on Amazon -- so the bids there rise higher. Sellers notice this quickly and begin to offer product on the higher-paying site. Amazon might become the ideal auction site for books and music (that makes sense given its product line), while eBay could still be best for hundreds of other product categories. Sellers will use the site offering the strongest demand, and because each item can only be placed for auction on one site, the site they choose is important. But there are enough product categories that both sites can thrive.
Last week, Yi-Hsin Chang (TMFPuck) interviewed eBay's Vice President of Marketing & Business Development, Steve Westly.
America Online (NYSE: AOL) bought When.com, a calendar service, in a stock deal and AOL's stock continued to blaze toward new highs. What's next? Like we say... "in five years... let alone ten...."
Starbucks (Nasdaq: SBUX) was upgraded by a large brokerage house and the company announced a new consumer products division -- focusing the branch of its business that sells bottled Frappuccino, ice cream, and other products, many of which have yet to have been announced. The market potential is enormous and the head of the new division comes from Frito-Lay.
After the stock market closed, Starbucks reported sales of $153 million for the five-week period ended March 28, an increase of 27%. Same-store sales increased a healthy 6% for the five weeks, and have now increased 5% over the previous 26 week period. (Nice numbahs, Stahbucks.) The stock trades at 38 times next year's earnings per estimates while the company is expected to grow over 31% annually.
To close as the sun sets peacefully on the East Coast: today was a picture perfect day. Every Rule Breaker Port stock rose except for Trump Hotels (NYSE: DJT), our short.
Whadda performance. We're numb. Numb, we tells ya. Of course, we'll be here every day that the portfolio declines, too -- plenty of those days ahead -- being nothing but Foolish. It's the years that matter, not the days, and the past five years, as they steadily come to a head, have been.... wow. Numbing. Somebody pinch somebody.