Rule Breaker Portfolio

Rule Breaker Portfolio
Blue Mountain Peaks
Plus, eBay and Amazon prepare to report

By Jeff Fischer (TMF Jeff)

JUPITER, FL (Oct. 25, 1999) -- Do ya like electronic greeting cards? Somebody sure does.

Today Excite@Home (Nasdaq: ATHM) agreed to pay at least $350 million in cash and $430 million in newly issued stock -- so $780 million total -- for Blue Mountain Arts Publishing. BlueMountain.com is the leading electronic greeting card business in the world, claiming 65% market share. According to Media Metrix, the site was recently the 14th busiest site on the Internet in terms of traffic, as 9 million unique souls traipsed over Blue Mountain last month.

Until today's windfall, however, 1999 had not been a banner year for BlueMountain. BlueMountain's monthly traffic peaked in February at 12.6 million unique visitors. Its slow but significant decline to 9 million people the past seven months has been caused by the seasonality of greeting cards and by increased competition.

Amazon (Nasdaq: AMZN) and Microsoft (Nasdaq: MSFT), both of whom were once supposedly interested in acquiring BlueMountain, launched their own greeting card businesses in the past year, while Americangreetings.com paid $100 million to America Online (NYSE: AOL) for prime real estate for its service. BlueMountain has done an astounding job (like Starbucks) of building a business without marketing or advertising, but the big-monied competition has taken chinks from its armor.

Don't cry, though, dear readers.

The holidays should raise BlueMountain's traffic, perhaps even to a high enough altitude that the site will climb back to a top-10 ranking among all websites. Whether or not we actually want a strong performance right now, though, I'm not sure. If BlueMountain meets stated performance objectives, Excite@Home will pay an additional $270 million in stock to the company, bringing BlueMountain's total price to $1.05 billion.

The price may sound steep for a company with an estimated 140 employees and $15 million to $50 million (yes, that's a wide range) in annual sales, all of it from ad banners. However, when you consider that publicly traded online-based companies with similar traffic volume are valued on the market at anywhere from $700 million to $19 billion, the price makes more sense.

Excite@Home just paid up to $1 billion for eyeballs. Excite's management states that the acquisition gives Excite's portal a 40% jump in its total Web reach, to an overall reach of approximately 34% of Internet traffic. Assuming that BlueMountain's traffic will return to at least 10 million unique monthly visitors, and assuming that Excite@Home will pay just over $1 billion for the company, it is paying about $100 per unique BlueMountain visitor.

Yahoo! (Nasdaq: YHOO) initially agreed to pay $3.6 billion for GeoCities when that site had 19 million unique visitors. That amounts to $189 per person. GeoCities also had 3.5 million "Homesteaders," who were people who had built 33 million combined Web pages on the GeoCity service, giving the site considerable sticking power. BlueMountain receives one million gift-giving transactions per day, and there is always another reason to send someone an e-card, so its site is sticky, too. All in all, when you weigh the two deals against one another, the prices paid per person at GeoCities and BlueMountain are fairly evenly weighted. And in my opinion, BlueMountain is a better brand.

It is a strong enough brand that we must be concerned that Excite@Home doesn't harm the BlueMountain brand. BlueMountain has flourished as a throwback to the 1960s, hippy-style, free love, dope smokin' (okay, that was unnecessary), free-for-all site. Excite@Home must be careful not to crush the spirit of the site beneath large corporate rhetoric. AtHome's management wants to market its broadband services to BlueMountain users, but it had better do so carefully... and gradually. Excite's management wants the BlueMountain site to pursue expanding e-commerce possibilities. Again... it had better pursue this carefully, and gradually.

My overall opinion on Excite@Home's new $780 million investment is that the capital wasn't poorly used, as long as management is able to leverage BlueMountain users in most ways that it hopes.

I believe it would be difficult to buy 9 million unique online visitors for anything less than $780 million in current market conditions, so on a numbers-basis, and according to present public market prices, Excite@Home scored an initially reasonable deal. Now, whether or not revenue will follow so that ATHM actually gets a return on its investment in coming years is in the hands of management. $1 billion could have bought a boatload of advertising, so let's hope that the demographics behind BlueMountain's 9 million unique users is very favorable to broadband and e-commerce.

A closing thought: this acquisition means that Excite@Home is not likely to undergo a major restructuring itself anytime soon, as some were predicting.

eBay (Nasdaq: EBAY) and Amazon (Nasdaq: AMZN) carried the Rule Breaker on strong shoulders today, as both stocks rose in advance of quarter three earnings reports. eBay announces results tomorrow at 5:00 p.m. ET. The company is expected to earn $0.01 per share on estimated revenue of $56.8 million. Gross merchandise sales should top $700 million and registered users should top 7 million. Investors will also be interested in gross and operating margin results, although recent investments in technology will keep these below their potential.

When Amazon reports Q3 results on Wednesday afternoon, sales growth, customer accounts, repeat purchases, and revenue per account will be closely watched. Gross margin percentage and sales and marketing expenses will also be scrutinized. I believe that we're going to see everything within the desired long-term range. Amazon's revenue is estimated to be near $330 million, up from $314 million, with gross margin of about 22%. Customer accounts should total around 12 million and repeat purchases will hopefully be above 65% of total purchases again.

Let's close all this number talk by moving to the much more significant and human side of the Fool. Please visit the Fool's charity drive and share your thoughts. Which charities are worth Fools' "investment"? Which charities do the most good for the most people?

Fool on!

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As always, share any thoughts about tonight's recap in our Rule Breaker Strategies board. And if you are looking into, or for, any new Rule Breaker prospects, the conversation always continues on our Rule Breaker Companies message board.






Rule Breaker Portfolio

10/25/99 Closing Numbers
Ticker Company Dly Pr Chg Price
AMGNAMGEN INC-1 3/16$79.94
AMZNAMAZON.COM1/8$82.75
AOLAMERICA ONLINE7/8$121.25
ATHMAT HOME CORP CL A3/4$39.81
CATCATERPILLAR INC-1 1/4$53.94
CHVCHEVRON CORP-3 3/4$90.00
DDDU PONT (EI) DE NEMOURS-15/16$63.88
EBAYEBAY INC1/4$150.88
GTGOODYEAR TIRE & RUBBER CO1/2$45.19
IOMIOMEGA CORPUnch.$3.13
SBUXSTARBUCKS CORP7/16$23.81
TDFX3DFX INTERACTIVE1/16$8.50

  Day Week Month Year
To Date
Since
8/5/94
Annualized
Rule Breaker 2.13% 2.13% 6.87% 39.60% 1,303.79% 65.82%
S&P 500 -.62% -.62% .85% 5.24% 182.21% 21.97%
S&P 500(DA) -.62% -.62% .85% 5.82% 196.46% 23.13%
NASDAQ -.02% -.02% 2.54% 28.42% 291.01% 29.83%

Trade Date # Shares Ticker Cost/Share Price LT % Val Chg
8/5/942200AOL0.917$121.2513,121.02%
9/9/972640AMZN3.188$82.752,496.07%
5/17/951960IOM1.280$3.13144.06%
12/16/98580AMGN42.889$79.9486.38%
2/26/99300EBAY100.527$150.8850.08%
12/4/98900ATHM28.040$39.8141.98%
2/23/99300CAT46.964$53.9414.85%
2/23/99180CHV79.169$90.0013.68%
2/20/98260DD58.844$63.888.55%
2/23/99290GT48.715$45.19-7.24%
7/2/98470SBUX27.955$23.81-14.82%
1/8/98425TDFX25.667$8.50-66.88%

Trade Date # Shares Ticker Cost Value LT $ Val Ch
8/5/942200AOL$2,017.62$266,750.00$264,732.40
9/9/972640AMZN$8,415.03$218,460.00$210,045.00
12/16/98580AMGN$24,875.50$46,363.75$21,488.25
2/26/99300EBAY$30,158.00$45,262.50$15,104.50
12/4/98900ATHM$25,236.13$35,831.25$10,595.13
5/17/951960IOM$2,509.63$6,125.00$3,615.37
2/23/99300CAT$14,089.25$16,181.25$2,092.00
2/23/99180CHV$14,250.50$16,200.00$1,949.50
2/20/98260DD$15,299.44$16,607.50$1,308.06
2/23/99290GT$14,127.38$13,104.38($1,023.00)
7/2/98470SBUX$13,138.63$11,191.88($1,946.75)
1/8/98425TDFX$10,908.63$3,612.50($7,296.13)
  Cash: $5,954.23  
  Total: $701,644.30  



Note
The Fool Portfolio was launched on August 5, 1994, with $50,000. It was renamed the Rule Breaker Portfolio in October 1998. The investing strategy began with the first investments of the Fool Port and has evolved with time and experience. In July 2001, the portfolio began adding $12,500 each quarter (We missed Jan. 2002, so we added $25,000 in April 2002). We skip a quarter if we have enough uninvested cash or cash available in stocks we would prefer to sell to make new investments. All transactions are shared and explained publicly before being made, and returns are compared in each week's column to the S&P 500 (including dividends where noted) and the Nasdaq composite. For a history of all transactions, please click here.