Fool Portfolio Report
Wednesday, March 26, 1997
by Jeff Fischer (MF BudFox)

ALEXANDRIA, VA., (March 26, 1997) -- The Fool tacked on a two percent gain today, adding to yesterday's five percent rise, and bringing it within striking distance of the Nasdaq's 1997 performance, and only a horseshoe toss away from the S&P.

Okay. It's a long toss. But who might have the stronger arm?

The Fool is up 6.48% in March, while the Nasdaq is down 3.05% and the S&P is off a fraction. It's been a good month for the portfolio, following a very poor one in February. In its history, the Fool is easily more than doubling both the Nasdaq and S&P.

AMERICA ONLINE (NYSE: AOL) continued to flex its new-found muscle, rising $2 3/8 to $44 3/4. No news from the online leader, other than announcing the winners of the Members Chioce Awards. Many winners were those working under AOL's Greenhouse Networks banner, which includes yours truly. The Fool was one site granted an award, thanks to YOU, readers. Also winning were Mom's Online and PlanetOut, to name two.

This news, believe me, didn't cause the stock to rise.

Based on a rough subscriber-based valuation, a "fair" price for AOL's stock lands the stubs around $53.50 per share. That number is arrived at by multiplying members (8 million) by expected life-subscription payments, to get:

8 million x $16 = $128,000,000 x 40 months ------------------------- = $5.12 billion market cap

The $5.12 billion market cap is about $1 billion above AOL's current capitalization, implying the fair stock price of $53.50. This number is conservative because advertising and transaction revenues are not included, and the implied 40 month life-span of a subscriber is questionable. Churn is down and membership-spans are increasing. Also, have you noticed better access yet? Many are saying it's slowly improving.

Advertising is going to increasingly impact the Internet. Leading sites (AOL is certainly counted as one) will acquire advertisers and the dollars to thrive. Secondary sites may have more trouble as time goes on. Yahoo!, Netscape and AOL were some companies cited as receiving significant portions of the industry's advertising dollars in 1996.

Online ad spending totaled around $300 million in 1996, and will probably double this year. Though, last year, $260 million of that money went to Web sites, and only $40 million to online publishers such as AOL.

This year looks more promising for America Online. In its second quarter alone, announced in February, AOL earned $40 million from advertising and online commerce, compared to only $13 million the year before -- while revenue as a whole rose to $400 million from $249 million. Advertising and online commerce accounted for 10% of revenues in the second quarter.

AOL's new Casablanca format debuts this summer. What kind of format might AOL roll out ten years from now? Will America Online ever take its hybrid network and just plop it onto the Internet, in hopes of earning more advertising and commerce dollars? Meanwhile, AOL would still be a fancy Internet Service Provider (ISP) with all the extras.

Meanwhile -- though admittedly a small player -- the news that NETCOM (Nasdaq: NETC) is moving away from flat-rate pricing may portend similar price moves from others in the industry. As soon as flat-rate pricing was implemented by everyone, many were predicting it wouldn't last. If advertising and online commerce can pay for the cost of offering flat-priced networks to millions, though, perhaps an inexpensive online account for everyone will remain feasible.

Looking elsewhere: while the Nasdaq enjoyed a strong day, rising 1.68%, the S&P and Dow didn't fare so well. The Foolish Four fell 0.48% today, and on the year the four stocks are down 1.70%, the exact amount that the Nasdaq has lost since January First.

The Fool Four have been hampered by weakness in AT&T (NYSE: T) -- the company is cutting jobs and lowering earnings expectations while aiming to become a competitive giant in the years ahead -- and GENERAL MOTORS (NYSE: GM). General Motors has drifted lower while vehicle sales have lagged last year's numbers. 1996, as I've mentioned before, saw more cars sold than any other year, except for 1986. General Motors limped through the year with labor problems, though, many of which have been remedied this year. Still, vehicle numbers are behind last year's thus far. Off-setting these two, CHEVRON (NYSE: CHV) and 3M (NYSE: MMM) have been strong. Chevron set another high today.

3COM (Nasdaq: COMS) was another Fool stock with a nice upward move. It rose $2, to $35 3/8, and trades at 17 times the year's estimate. The company's year ends in May.

Will the slaughter of networking stocks prove to be a strong buying opportunity? Do you have an urge to buy networking stocks right now? Probably not. Probably no more than you did when semiconductor stocks were in the dog house.

Today 3Com recognized the lawsuit filed against it in California on Monday, which was mentioned in yesterday's recap. The company stated that it felt the lawsuit was baseless. On reading the articles I could find, I agree. It seems whenever a stock falls precipitously, these types of lawsuits come out of the American wood-work -- a wood-work which is carved much differently from those carved in Europe or other parts of the world, it seems. Some of America's wood-work is carved with a shallow knife.

3Com has better fights to worry about, namely CISCO SYSTEMS (Nasdaq: CSCO) and ASCEND COMMUNICATIONS (Nasdaq: ASND). Combining itself with US ROBOTICS (Nasdaq: USRX), we now have a fairer fight.

Let's hear some specs from the announcer (imagine echoes from the microphone, and the shouts of the crowd):

LADIES AND GENTLEMEN!!... in this corner of the ring... we have, with a combined market cap of over $11 billion, trading at only 2.2 times sales, trading at below twenty times anticipated earnings, with hardly a similar product between them, thus combining with almost no over-lap costs!, wearing the red and white, and the blue and white boxers... two undisputed champions of the world!!...3COM AND U.S. ROBOTICS!!

Meanwhile!!... in the other corner of the ring... to see what we have here... Please, ladies and gentlemen! -- turn your eyes to the Boring Portfolio right now, for the continuation....

(c) Copyright 1997, The Motley Fool. All rights reserved. This material is for personal use only. Republication and redissemination, including posting to news groups, is expressly prohibited without the prior written consent of The Motley Fool.


Stock Change Bid -------------------- AOL +2 3/8 44.75 T --- 36.00 ATCT + 1/8 6.75 CHV + 1/2 72.13 GM -1 1/8 55.88 IOM + 5/16 17.13 KLAC +1 5/8 39.13 LU - 3/4 52.25 MMM -1 3/8 87.38 COMS +2 35.38
Day Month Year History FOOL +2.05% 6.48% -3.17% 158.44% S&P: +0.18% -0.04% 6.72% 72.45% NASDAQ: +1.68% -3.05% -1.70% 76.22% Rec'd # Security In At Now Change 5/17/95 2010 Iomega Cor 2.52 17.13 579.84% 8/5/94 680 AmOnline 7.27 44.75 515.30% 8/11/95 125 Chevron 50.28 72.13 43.43% 8/12/96 110 Minn M&M 65.68 87.38 33.04% 10/1/96 42 LucentTech 47.62 52.25 9.73% 8/12/96 280 Gen'l Moto 51.97 55.88 7.51% 8/12/96 130 AT&T 39.58 36.00 -9.04% 8/24/95 130 KLA Instrm 44.71 39.13 -12.49% 8/13/96 250 3Com Corp. 46.86 35.38 -24.51% 10/22/96 600 ATC Comm. 22.94 6.75 -70.57% Rec'd # Security In At Value Change 8/5/94 680 AmOnline 4945.56 30430.00 $25484.44 5/17/95 2010 Iomega Cor 5063.13 34421.25 $29358.12 8/11/95 125 Chevron 6285.61 9015.63 $2730.02 8/12/96 110 Minn M&M 7224.44 9611.25 $2386.81 8/12/96 280 Gen'l Moto 14552.49 15645.00 $1092.51 10/1/96 42 LucentTech 1999.88 2194.50 $194.62 8/12/96 130 AT&T 5145.11 4680.00 -$465.11 8/24/95 130 KLA Instrm 5812.49 5086.25 -$726.24 8/13/96 250 3Com Corp. 11714.99 8843.75 -$2871.24 10/22/96 600 ATC Comm. 13761.50 4050.00 -$9711.50 CASH $5240.09 TOTAL $129217.72