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Rule Breaker Portfolio

<THE RULE BREAKER PORTFOLIO>

@Home's First Quarter
Thumbs up? Thumbs down? Thumbs horizontal?

by Jeff Fischer (TMFJeff)

ALEXANDRIA, VA (April 14, 1999) -- Yesterday afternoon @Home (Nasdaq: ATHM) announced first quarter '99 results that were in-line with expectations. Today the stock declined 12% in tandem with deflating prices of many Internet leaders and the near 3% fall of the Nasdaq market. Reviews of @Home's first quarter results were mixed. If the results were a movie, they wouldn't sweep the Oscars, but they would be called "a quality production" and the producer would be said to have significant promise.

Let's put on our Foolish reviewer's cap and take a look at @Home's first quarter. Thumbs up? Thumbs down? Or thumbs sideways? (Thumbs sideways is a lame rating that shouldn't have been created. That's like saying to someone after you see them give a speech or perform on stage, "Yeah, you were ok. Whatever.")

Anyway, lights... camera... action!

@HOME MEETS MR. FIRST QUARTER
Written by Mr. Tom Jermoluk, CEO
Produced by Tom Jermoluk and 570 employees

Excluding charges, @Home reported a loss of $8.9 million, or 7 cents per share (meeting estimates), as first quarter revenue rose 30% to $25.1 million. The company's subscriber base jumped 39% from the end of 1998 (when it had 331,000 subs), ending the first quarter at 460,000. The subscriber base has grown 413% in the last year.

(Ok. This is pretty good so far, but dry. The scene is set. Time for the problem.)

The stock fell $23 today.

(Ok. That was a typically quick Hollywood drive-by shooting scene.)

Some argue that @Home declined more than other Internet stocks today because the company's revenue and subscriber growth was not up to snuff. Some even proposed that @Home could miss its goal of 1.1 million subscribers by the year 2000. Although a shortfall is always possible, it doesn't seem the most likely outcome. @Home is steadily increasing its reach (up to 15 million homes from 13 million last quarter) and after growing subscribers 39% this quarter, if it can increase subs by 35% each of the next three quarters (not easy, but far from impossible), it will have over 1.13 million subscribers before 2000.

The fact that AT&T (NYSE: T) is committed to upgrading TCI's cable lines in an orderly fashion should help @Home reach goals, as will @Home's growing partnerships with cable companies and the concurrently soaring demand for high-speed Internet access. Also of assistance eventually -- perhaps before 1999 ends -- will be @Home's TV set-top Internet service. TV access isn't the focus right now (merely getting into homes is), but it represents a market of over 60 million homes that will be split among Internet providers. If the success of cable TV is any guide, Internet via the television (it's like enhanced television on a whole new level) will probably succeed in the long term, too.

Generally, @Home's mission is being executed as expected, with its cable reach steadily draping this continent and other countries (including Japan and the UK). Large surprises did not accompany this first quarter report. However, nebulous concerns rose above Wall Street like columns of thin smoke on a warm evening -- concerns that swirled around the topic of @Home's future growth. These kinds of concerns are experienced at almost all fast-growing companies, though, at various points in their history. In @Home's case, the concerns were not well defined, giving us reason to think that they're random and not significant in the long term.

Whatever the reason for the stock's decline (a combination of its quick rise, the concern, and the stock market dropping), following the strong ascent (@Home was one of the top performers on the market in the first quarter), it isn't surprising to see the stock sink. The same holds true for most Internet stocks right now, all of which could arguably use a break following their recent sprint. Our long-term objective in owning these stocks (AOL, AMZN, EBAY, AHTM) has not changed. With @Home, our reason to hold the stock lies in the fact that it is the leader (Top Dog, First Mover) in high-speed cable Internet access and it has smart management. Period.

@Home now has distribution deals with 21 cable partners, up from 16 at the end of last year, representing potential access to 61 million homes. No competitor comes close.

@Home's pending partner -- Excite (Nasdaq: XCIT) -- will announce earnings tomorrow after the market closes. Excite is expected to report positive earnings of $0.05 per share, up from a loss last year, while revenue should more than double to above $52 million. The merger with Excite will give @Home more advertising revenue and should help grow its subscriber base, too. The partnership should become official in late May. @Home shareholders, check out excite.com if you haven't.

The End... until Part 2.

(Hmmm. Ok. That was a strange movie, but good enough. It has promise. I give it the thumbs sideways. No, wait. Thumps up.)

Elsewhere in the Rule Breaker Port, our Nasdaq stocks and America Online fell an average of nearly 6% apiece, showing them to be at least twice as volatile as the Nasdaq market -- not unusual. Our Foolish Four heavies, however, threw the stock market around like a rag doll. Caterpillar (NYSE: CAT) gained 10% after the CEO proclaimed that he was happy (or something close to that); DuPont (NYSE: DD) rose 7% for some reason (we needn't know with the Foolish Four); and even Goodyear (NYSE: GT) rolled ahead.

As Pauly reported on Monday, we'll see first quarter results from Iomega (NYSE: IOM) tomorrow. The consensus estimate is $0.00 per share. Intel (Nasdaq: INTC) reported results yesterday and today a well-known analyst was on the airwaves saying that he'd sell the stock. Find out why we think that selling Intel is very poor advice in today's Drip Port.

Finally, Bore Port announced that it's buying American Power Conversion (Nasdaq: APCC). Find out why.

Oh, and truly finally: we're taking your suggestions for potential Rule Breaker companies to study in this column on the Rule Breaker message board. For example, if you believe that Soggy Bagel and Cold Coffee, Inc. (Ticker: SICK) is a Rule Breaker that could challenge Starbucks (Nasdaq: SBUX), post your thoughts on the Rule Breaker board. We'll try to cover your potential Rule Breaking companies here as soon as possible.

Fool on!

What's up with Harry Jones today?

04/14/99 Close
Stock  Change    Bid 
---------------- 
AMZN  -10 3/8 168.00
AMGN  -3 13/16 72.06
AOL   -9 1/4  150.00
ATHM  -22 15/16 159.06
DJT   -  3/16   4.25
CHV   -3 3/8   91.13
CAT   +5 15/16 60.69
DD    +4 7/16  65.25
GT    +1 5/8   53.75
IOM   +  1/8    5.13
SBUX  -  1/2   31.50
TDFX  +  5/8    21.88
EBAY  -10     162.88

 
                   Day   Month    Year  History  Annualized 
      R-BREAKER  -5.34%   2.84%  63.45% 1540.51%   81.58%
        S&P:     -1.58%   3.28%   8.39%  203.37%   26.70%
        NASDAQ:  -2.94%   1.86%  14.36%  248.17%   30.47%


    Rec'd    #  Security     In At       Now      Change
   8/5/94  2200 AmOnline       0.91    150.00   16404.37%
   9/9/97  1320 Amazon.com     6.58    168.00    2453.49%
  5/17/95  1960 Iomega Cor     1.28      5.13     300.26%
  12/4/98   450 @Home Corp    56.08    159.06     183.63%
 12/16/98   580 Amgen         42.88     72.06      68.08%
  2/26/99   300 eBay         100.53    162.88      62.02%
  4/30/97 -1170*Trump*         8.47      4.25      49.82%
  2/23/99   300 Caterpilla    46.96     60.69      29.22%
  2/23/99   180 Chevron       79.17     91.13      15.10%
   7/2/98   470 Starbucks     27.95     31.50      12.68%
  2/20/98   260 DuPont        58.84     65.25      10.89%
  2/23/99   290 Goodyear T    48.72     53.75      10.34%
   1/8/98   425 3Dfx          25.67     21.88     -14.78%

    Rec'd    #  Security     In At     Value      Change
   8/5/94  2200 AmOnline    1999.47 330000.00  $328000.53
   9/9/97  1320 Amazon.com  8684.60 221760.00  $213075.40
  12/4/98   450 @Home Corp 25236.13  71578.13   $46342.00
  2/26/99   300 eBay       30158.00  48862.50   $18704.50
 12/16/98   580 Amgen      24867.50  41796.25   $16928.75
  5/17/95  1960 Iomega Cor  2509.60  10045.00    $7535.40
  4/30/97 -1170*Trump*     -9908.50  -4972.50    $4936.00
  2/23/99   300 Caterpilla 14089.25  18206.25    $4117.00
  2/23/99   180 Chevron    14250.50  16402.50    $2152.00
   7/2/98   470 Starbucks  13138.63  14805.00    $1666.38
  2/20/98   260 DuPont     15299.43  16965.00    $1665.57
  2/23/99   290 Goodyear T 14127.38  15587.50    $1460.13
   1/8/98   425 3Dfx       10908.63   9296.88   -$1611.75

                              CASH   $9924.87
                             TOTAL $820257.37
Note: The Rule Breaker Portfolio was launched on August 5, 1994, with $50,000. Additional cash is never added, all transactions are shared and explained publicly before being made, and returns are compared daily to the S&P 500 (including dividends in the yearly, historic and annualized returns). For a history of all transactions, please click here.

</THE RULE BREAKER PORTFOLIO>

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