Fool Portfolio Report
Friday, October 24, 1997
by Jeff Fischer (JeffF@fool.com)


ALEXANDRIA, VA (Oct. 24, 1997) -- In a volatile end to a volatile week, the Fool threw the horseshoe that hit the post, making it three out of five for the week. The days that the Fool did win, it won big, gaining 3.5% over the last five moons, while the S&P fell 0.27% and the Nasdaq lost 0.96%. Wednesday the Fool somersaulted ahead of the S&P and the Nasdaq for the year. Since January First, the Port is up 30.8% and the major indices have risen 27%.

It was earnings week for several Fool companies. AT&T, Lucent, KLA-Tencor, 3M, Chevron, and Amazon announced business results for the past three months. Only one company disappointed, and then only somewhat: Chevron reported a 7% drop in sales and the stock fell over a buck on the news. All of our other stocks rose following their companies' earnings announcements, but Amazon's stock wins claim to the wildest surge in the Fool Port jungle.

Thursday AMAZON.COM (Nasdaq: AMZN) announced third quarter revenue of $37.9 million and a net loss of $8.5 million. The revenue growth was enough to propel the stock $6 3/8 on Friday, to a new high. Amazon's stock rose $17 over the past five days. With a thin float that is largely sold short, many short-sellers are feeling the noose tighten around their necks and the floor dropping beneath their feet -- and they begin to hang -- hoping for the rope to break so they can drop back to the ground.

At $60 per share, the company has a market cap of $1.42 billion. Amazon now has trailing 12-month sales of $90.1 million, putting the stock at 15.8 times sales. Multiplying the most recent quarter by four in order to get the company's run-rate, we find a revenue run-rate of $151.5 million, putting the stock at 9.2 times projected sales. But of course, unlike your typical jogger, this company is actually growing in girth as it "runs" forward. Recent sales grew 36% from the second quarter, while customer accounts grew 54% -- from 610,000 to 940,000 by the end of September. Importantly, 55% of sales came from repeat customers, compared to just over 50% last quarter.

Hey, remember on October 14th -- a mere 14 days after the end of the quarter -- Amazon announced that it had hit its one millionth account? This means the company added 60,000 new accounts in two weeks, or an average of 4,300 per day. This indicates that the rate of account growth in those two weeks actually increased from the average growth rate achieved during the third quarter. From July 1 to October 1, customer accounts grew by 330,000, or an average of 3,666 per day, 17% below that achieved in the first two weeks of this month. Though two weeks is an entirely insignificant amount of time to measure, it's still good to see that account acquisition grew even more rapidly over this time period than the recent average.

Back to revenue:

If we allow for 33% revenue growth this quarter (considering it's the holiday season and that in the last quarter revenue grew 36%, though from a smaller base) we would see fourth quarter revenue of $50 million and total revenue for the year of $131 million. After that, if we allow for 15% revenue growth per quarter over the next three quarters, then by this time next year Amazon will have $250 million in trailing revenue. The stock trades at 5.6 times that number. If Amazon can reach $1 billion in sales around the year 2000 or 2001, and if the company can trade at two times sales, we'd see a stock at $84, or 40% above the current price (this is before considering the share count, which will increase, but hopefully not dramatically). This is in line with the thinking behind our initial buy report. To date, this investment has crushed the market, rising 56% for the Fool in six weeks. Another 40% more over three years would probably handily beat the market, too.

Looking more closely at the numbers for the third quarter, we see that cost of sales held dead even with the second quarter, at 81%. The $37.9 million in books that Amazon sold cost the company $30.7 million. Marketing and sales expenses increased to 29% of sales from 28% last quarter, but general and administrative costs were flat -- which is what caught my eye. Importantly, it didn't cost the company any more money in this category to sell another $10 million worth of books. This is worth noting because Amazon won't indefinitely spend 28% of sales on marketing and 10% of sales on product development, as it currently does. Those numbers will come down to realistic figures and if -- for one -- general and administrative costs remain flat while sales continue to rise (or even remain steady), you begin to see the argument for profits.

The recent research report by Morgan Stanley Dean Witter analyst Mary Meeker estimates earnings per share of $0.07 in 1999, $0.64 in 2000, and $1.33 in 2001. She admits as boisterously as anyone that these are mere estimates, but they're not shots in the dark: they're educated estimates. Profits are still too far away to talk about in-depth, but the bears act as if profits are several years out, even though 1999 begins in only fourteen months.

Back to the current quarter: The $8.5 million loss logically burned off an equal amount from the company's IPO stash of moola. Cash and equivalents now stand at $48 million, down from $56 million last quarter. If you assume the company's cash burn rises moderately each quarter for the next few quarters, and then begins to taper as losses decline, then Amazon has enough cash to last into 1999 when profits are expected.

It should continue to be an interesting stock to follow, and your friendly neighborhood Fool will be doing just that..

So what the heck is with INNOVEX (Nasdaq: INVX), eh? After rising 34% for the Fool, the stock is now down 0.76% from our buy point in late June. Innovex announced as far back as June that the fourth quarter would be slow. Since then -- sure as the water rises in the Mississippi -- disk drive peers have announced slow quarters as well. Each time a new peer announces weak results, Innovex goes down with it, despite the fact that the Innovex news is so stagnant with age that we're all tired of reading about it here -- and that we can probably smell it whenever it's mentioned. Granted, the quarter is expected to be slower than Innovex first predicted, but that's old news, too.

Over the past few weeks, HUTCHINSON TECHNOLOGY (Nasdaq: HTCH), WESTERN DIGITAL (NYSE: WDC), and especially SEAGATE (NYSE: SEG) announced earnings that were below expectations while claiming that it was "a challenging quarter." The challenging quarter is old news at Innovex, and Seagate and Hutchinson have some company-specific issues baked into their weak numbers as well -- which shouldn't weigh on our company.

Innovex announces earnings November 4th. Estimates stand at $0.50 per share, a 72% increase over last year. The company has recently stated that it's comfortable with the estimate. Also, lead-wire production has increased to 11 million per week from as low as 9 million per week in the slower summer months, so the coming quarter should improve considerably -- though 72% earnings growth year-over-year is nothing to scoff at. At $27.50 the stock trades at 11.9 times estimates for the year that ended last month.

Realistically, the largest concern holding the stock down isn't earnings, but is changing technology and the long-expected competition from Hutchinson Tech, which we've talked about here frequently, too. Innovex is believed to have a more adaptable technology at a lower cost, though. Also, the market for Innovex's current lead-wire product isn't simply drying up and disappearing, as increased demand in this very quarter iterates.

KLA-TENCOR (Nasdaq: KLAC) announced earnings on Tuesday that were better than expected and the stock was upgraded by analysts. But the industry as a whole was downgraded on Friday by another analyst, taking KLA and anything related to semi-equipment down with it. The stock is so volatile that it's hardly worth writing about when it does fall or rise $5. AT&T (NYSE: T) announced estimate-beating earnings and the hire of a new CEO, Michael Armstrong, from Hughes Electronics. AT&T's stock made a new 52-week high, as did AOL, Iomega, GM, and Amazon this week.

Tuesday I said that on Friday we'd take a look at some historical market figures from the past four decades: how frequently the market has fallen in past years, how much, how quickly it recovered, and why. We had too much news this week to do that today. I'll try to write about that next week on a slow news day.

Have a Foolish, well-deserved weekend!


TODAY'S NUMBERS
Stock Change Bid ---------------- AMZN +6 3/8 59.88 AOL -2 1/16 87.19 T +1 1/4 50.31 CHV --- 83.50 DJT - 1/16 9.69 GM -2 3/16 68.06 INVX - 3/4 27.50 IOM - 1/8 28.50 KLAC -5 7/8 52.38 LU -2 3/8 81.63 MMM -3 5/8 95.75 COMS -1 1/8 45.81
Day Month Year History FOOL -0.67% 3.91% 30.80% 249.09% S&P: -0.95% -0.60% 27.12% 105.42% NASDAQ: -1.22% -2.06% 27.88% 129.24% Rec'd # Security In At Now Change 8/5/94 355 AmOnline 7.27 87.19 1098.80% 5/17/95 980 Iomega Cor 2.52 28.50 1030.95% 10/1/96 42 LucentTech 47.62 81.63 71.42% 8/11/95 125 Chevron 50.28 83.50 66.05% 9/9/97 290 Amazon.com 38.22 59.88 56.65% 8/12/96 110 Minn M&M 65.68 95.75 45.79% 8/12/96 280 Gen'l Moto 51.97 68.06 30.96% 8/12/96 130 AT&T 39.58 50.31 27.12% 8/24/95 130 KLA-Tencor 44.71 52.38 17.14% 6/26/97 325 Innovex 27.71 27.50 -0.76% 8/13/96 250 3Com Corp. 46.86 45.81 -2.24% 4/30/97 -1170 *Trump* 8.47 9.69 -14.39% Rec'd # Security In At Value Change 8/5/94 355 AmOnline 2581.87 30951.56 $28369.69 5/17/95 980 Iomega Cor 2509.60 27930.00 $25420.40 9/9/97 290 Amazon.com 11084.24 17363.75 $6279.51 8/12/96 280 Gen'l Moto 14552.49 19057.50 $4505.01 8/11/95 125 Chevron 6285.61 10437.50 $4151.89 8/12/96 110 Minn M&M 7224.44 10532.50 $3308.06 10/1/96 42 LucentTech 1999.88 3428.25 $1428.37 8/12/96 130 AT&T 5145.11 6540.63 $1395.52 8/24/95 130 KLA-Tencor 5812.49 6808.75 $996.26 6/26/97 325 Innovex 9005.62 8937.50 -$68.12 4/30/97 -1170*Trump* -9908.50 -11334.38 -$1425.88 8/13/96 250 3Com Corp. 11714.99 11453.13 -$261.87 CASH $32438.81 TOTAL $174545.50

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