Rule Breaker Portfolio

<THE RULE BREAKER PORTFOLIO>

eBay on Fire
Waters of Amazon can't douse it

by Jeff Fischer (TMFJeff@aol.com)

ALEXANDRIA, VA (April 26, 1999) -- Day one in what promises to be an interesting week found the Rule Breaker at a new all-time high, up 3.7% and now 81% for the year, as America Online jumped 9% and eBay rose 4% prior to announcing first quarter results at 5 p.m. EST. Demonstrating the power of buy and hold investing, AOL's $13 advance amounted to $28,000 in one-day gains off our cost-basis of $1,900. Never has a day-trader accomplished such a percentage return off an investment base in a single day. Traders aren't Fools.

Why the leap in AOL? The company will announce third quarter results tomorrow. The stock supposedly rose in anticipation of favorable numbers. $0.09 per share is the published estimate.

As I type, eBay (Nasdaq: EBAY) is about to announce earnings and I'm waiting for the live conference call, broadcast over the Internet, to begin. Given this, tonight we have a "real time" column. In the film Titanic, the ship went down (don't cry now) just about in "real time." Tonight in this column, we'll have almost the same thing: real time, blow by blow details. Right now, classical music is playing prior to the eBay conference call. (It's not bad.) While we wait, let's check in on Starbucks.

Oh, wait. Here's an announcement. "The eBay conference call has reached capacity. We're sorry. Please disconnect."

So, this is Titanic-like after all. The premise for the column, it would appear, has just sunk.

Despite the fact that we hooked into the call 20 minutes prior to its start, capacity has been exceeded and we can't listen. How capacity can be reached for an online broadcast I'm not certain, but eBay probably wanted to control the number of live hookups. That's understandable, and the company is still to be commended. Early this morning it issued a press release inviting the world -- everyone -- to its live conference call and providing the link to its broadcast. This is what all companies should do, and most will do, in the future. We just can't hear this particular call live.

At least we have a lifeboat. The replay will be available after the call, and although it would have been excellent to hear the call live, missing it is far from a disaster. We could all but ignore this quarter or the next, or the next after that, because we're most interested in long-term trends. We cover the news closely because we enjoy it.

Let's report what we can for now: today's news and the earnings press release.

Today eBay announced it will acquire premier auction house Butterfield & Butterfield (let's call 'em B&B) for approximately $260 million in stock. The acquisition should add to eBay's earnings this year. Given these healthy industry dynamics, it's likely that eBay will continue to acquire companies using its strong stock as currency.

The acquisition was smiled upon because it gives eBay an immediate and strong foothold in the upper-end of auctioneering. Through B&B, eBay will host auctions for pricey art and antiques -- otherwise known as "Knick Knacks for the Wealthy" -- over the Internet. This high priced, high-margin auction niche complements eBay's already thriving Beanie Baby, Star Wars figures, first edition Fitzgerald novels, and Mazda Miata auctions. If that sentence sounds like a contradiction of itself, it is.

Much of the media is saying that the acquisition of B&B is "key" because eBay, to date, only offers cheap trinkets. However, the site is regularly hosting sales of cars, first edition Hemingways that sell for a few hundred dollars apiece, and boats, for example. So while it is excellent that eBay will have an entire branch devoted to expensive items, it already has far more for sale on its site than cheap junk.

eBay leapt early on B&B. California-based B&B will cancel the initial public offering (IPO) it had planned. Seeing the prices that IPOs related to anything "Internet" are reaching, eBay may have scored quite a coup in buying B&B before it hit the market, assuming B&B would have had an online spin to its IPO.

Let's check to see if eBay's earnings are out yet. Yup, here they are, baby.

eBay reports first quarter revenue of $34 million, up 469% from last year, and earnings per share of $0.05, soundly topping the $0.02 estimate. The company's $34 million in revenue wholeheartedly thumped estimates, too. The average revenue estimate was $25.3 million. Customer accounts rose a bracing 71% from the last quarter, to 3.8 million from 2.1 million. The company hosted over 22.9 million auctions last quarter, up from 13.6 million. The value of the goods traded on the site reached $541 million, up 76% from $307 million last quarter.

The eBay balance sheet: cash rich, even more so than last quarter, and no long-term debt.

Management spent to build the staff and added $8 million in computer equipment, but eBay's gross margin remained a healthy 85% and its operating margin was a strong 28%. On a quick glance, I believe that eBay has the second-highest profit margin of any company in the Rule Breaker Portfolio. The company with the highest net margin: Amgen (Nasdaq: AMGN).

Woah. 50 minutes does fly. This real-time column must soon end!

We'll have much more on eBay this week after we hear the conference call replay. You can hear (and see!) this puppy yourself right here, at http://www.videonewswire.com/. To discuss eBay, visit our eBay message board.

As for Starbucks (Nasdaq: SBUX), the stock hit a new high, rising 7%. Last Thursday, Starbucks announced that it'll launch a new Internet-based business that will be unrelated to coffee but promotable through its 2,200 locations. This development appears to be smart management willing to take risks in order to capitalize on the attractive dynamics of a new medium, the Internet, even though it's outside the company's core business. (Or is it? The true core business of any public company is to create shareholder value.)

Starbucks will share details of its new Internet venture before the end of the quarter. For speculation on what CEO Howard Schultz (who's on the board of eBay) and his company, Starbucks -- a classic Rule Breaker -- might tackle next, visit our Starbucks message board. Many Fools are already hypothesizing and we'll share your ideas here on Thursday.

So, tomorrow we see results from America Online. On Wednesday, Amazon.com (Nasdaq: AMZN) reports.

To close this report with more "real-time coverage," this column now gets sent to our Fool HQ editors (typically Brian Bauer and Bob Bobala -- the B&B&B&B team). They typically read it, need not change a single comma (editors: please don't edit this gross mis-statement), and then send it to our Fool production team (this column is typically sent to TMF Conch in particular, who hails from Key West). Your Foolish correspondent, meanwhile, might wander into the Starbucks across the street to marvel that another Foolish evening has just begun.

Fool on!

What's up with Harry Jones today?

04/26/99 Close
Stock  Change    Bid 
------------------ 
AMGN  +3 1/8     68.25
AMZN  -2 15/16  207.19
AOL   +13 5/8   160.00
ATHM  +2 1/16   160.56
CAT   +1 7/16    62.00
CHV   -  7/16    95.44
DD    -  3/16    66.75
DJT   -  3/16     4.25
EBAY  +8 7/8    209.00
GT    +1 1/8     56.75
IOM   -  1/16     5.06
SBUX  +2 5/16    34.31
TDFX  -1         17.81


                  Day     Month  Year   History   Annualized 
      R-BREAKER  +3.76%  13.86%  80.97% 1716.38%  84.77%
        S&P:     +0.24%   5.73%  10.96%  210.25%   27.09%
        NASDAQ:  +2.37%   7.73%  20.95%  268.25%   31.79%


    Rec'd    #  Security     In At       Now      Change
   8/5/94  2200 AmOnline       0.91    160.00   17504.67%
   9/9/97  1320 Amazon.com     6.58    207.19    3049.11%
  5/17/95  1960 Iomega Cor     1.28      5.06     295.38%
  12/4/98   450 @Home Corp    56.08    160.56     186.31%
  2/26/99   300 eBay         100.53    209.00     107.91%
 12/16/98   580 Amgen         42.88     68.25      59.18%
  4/30/97 -1170*Trump*         8.47      4.25      49.82%
  2/23/99   300 Caterpilla    46.96     62.00      32.02%
   7/2/98   470 Starbucks     27.95     34.31      22.74%
  2/23/99   180 Chevron       79.17     95.44      20.55%
  2/23/99   290 Goodyear T    48.72     56.75      16.49%
  2/20/98   260 DuPont        58.84     66.75      13.44%
   1/8/98   425 3Dfx          25.67     17.81     -30.60%

    Rec'd    #  Security     In At     Value      Change
   8/5/94  2200 AmOnline    1999.47 352000.00  $350000.53
   9/9/97  1320 Amazon.com  8684.60 273487.50  $264802.90
  12/4/98   450 @Home Corp 25236.13  72253.13   $47017.00
  2/26/99   300 eBay       30158.00  62700.00   $32542.00
 12/16/98   580 Amgen      24867.50  39585.00   $14717.50
  5/17/95  1960 Iomega Cor  2509.60   9922.50    $7412.90
  4/30/97 -1170*Trump*     -9908.50  -4972.50    $4936.00
  2/23/99   300 Caterpilla 14089.25  18600.00    $4510.75
   7/2/98   470 Starbucks  13138.63  16126.88    $2988.25
  2/23/99   180 Chevron    14250.50  17178.75    $2928.25
  2/23/99   290 Goodyear T 14127.38  16457.50    $2330.13
  2/20/98   260 DuPont     15299.43  17355.00    $2055.57
   1/8/98   425 3Dfx       10908.63   7570.31   -$3338.31

                              CASH   $9924.87
                             TOTAL $908188.93

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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