Fool Portfolio Report
Thursday, February 5, 1998
by Jeff Fischer (

ALEXANDRIA, VA (Feb. 5, 1998) -- Unfortunately for all of us, our reporting on (please read the next three words very seriously and in a deep voice) "Market Under Siege" has come to an abrupt end. Yes, day seven of (do so once again) Market Under Siege was not meant to happen. Not this time, anyway. The Fool Port lost to both indices on weakness in America Online, 3Com, and Amazon.

On Tuesday we looked at Amazon's fourth quarter and 1997 results, running through revenues and looking at costs, and I promised to wrap this up today. Our first day of study now brings us to the loss from operations on the income statement, which was $9.8 million last quarter, or 14% of revenue. This compares to a $9.1 million loss in the third quarter, or 24% of revenue.

Here's the deal:

Imagine two paths out in the woods. You're in a helicopter looking down on the paths, so you can see where they start and where they end, despite all the trees. You can also see where the two paths merge somewhere in the middle of the woods. Now, Amazon is increasing revenue while decreasing expenses as a proportion and in absolute terms as well -- in some cases -- and so at some point (it's hard to guess when, but some people think within the next 18 months) these two paths will cross and Amazon will be making money on operations. The loss will turn into a gain.

In 1997 the company lost $29 million on sales of $147 million. Importantly, where did the loss come from? For the year, Amazon spent $38 million on advertising and $12 million on product development. But get this: Amazon spent a mere $6.5 million on general and administrative expenses. That's 4.4% of sales. Compare that to Borders Group (NYSE: BGP), a company that in the first nine months of 1997 spent $339 million in selling and administrative costs on $1.4 billion in sales, or a whopping 24% of sales.

Now, which is a leaner business model? And so if Borders can make money annually, don't ya think that Amazon eventually will be able to as well?

Naw. Come on!

Of course it should. Eventually.

Moving from the income statement to the balance sheet, we see that Amazon has $124 million in cash and equivalents, but it now has $76 million in long-term debt where it used to have none. Remember that in the last quarter the company took on some financing. For now, that's probably better than diluting the stock by selling more shares. Especially since debt in general can be had inexpensively these days with interest rates so low.

We also see that inventory is relatively low, at under $9 million (low inventory is good), and accounts receivable is all but non-existent because the company collects payment on a sale immediately. This is excellent -- a Dell Computer type arrangement. Also, accounts payable are $32 million. This is good too, believe it or not. We'd rather see the company delay payment and use its cash for its own good and pay as slowly as possible -- as long as we know that it can pay and isn't struggling.

At $59 per share Amazon trades at a market cap of $1.4 billion, or 9.5 times sales of $147 million. If the company can grow sales, say, 40% this year to $205 million (and I think that's being conservative seeing how quickly online commerce is growing), we have a current stock price at 6.8 times sales. If Amazon grows sales 60% to $235 million, the stock is trading at 5.9 times sales. If it doubles sales? 4.7 times. What is a fair price? You tell us. Whatever it is, the stock is much more reasonably priced than most Internet companies that have made a name for themselves. And the future of the Internet is probably much larger than we think. Think ten years from now, not three.

Well, now do think "three." Think 3Com (Nasdaq: COMS). The stock fell today despite news that the company agreed on a 56K standard with other industry leaders in Switzerland. 3Com also won a Gigabit Ethernet Tester's Award. 3Com is the market leader in ethernet networking. At $33, the stock trades at about 33 times earnings estimates for the year ending in May, and 17 times May 1999 estimates. Let's call that an aggressive estimate, though, just to be safe. We'll see how things unfold. Worthwhile shareholder value is not usually built in one year alone, anyway, so any expectations for such an event should be tempered -- unless the company in question is Iomega in 1994 and 1995. And 1996.

There is plenty else in the Hall of Portfolios tonight, with the Boring Portfolio writing about Carlisle Companies (NYSE: CSL) (Carlisle is a great company, if I do say so myself), and Tom is in the Cash-King Portfolio explaining the latest transaction or lack thereof, and preparing to announce another buy on Friday. Next, in the Drip Portfolio today I continue with a close look at Intel (Nasdaq: INTC), trying to explain the "mysteries" of its massive cash build-up, and in the Foolish Four portfolio Robert continues to write about the lessons of long-term Dow Dog investing.

To close, on a whim on Tuesday I asked for examples of businesses that require absolutely no employees, and I received some interesting email responses. One very Foolish response came from a Fool that I'll identify as simply Ed. Ed wrote:

"I own a company with no employees. It's called my portfolio. Starting up it did take some effort, but now I just ignore it and every few months look at these statements that get sent to me in the mail and see how much money it made.

"Each share in this company costs one dollar -- I buy a few more shares every month. Last year it earned a little over 30 cents a share, and has already earned 7 cents a share so far this first quarter. It doesn't pay a dividend -- all its profits go right back into the company.

"You could call ME an employee of this company, but I prefer to call myself the employer -- my portfolio works for me, not the other way around.

"- Ed"

Fool on!

--Jeff Fischer (Unfortunately no longer a part of Market Under Siege -- for now anyway!)

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Stock Change Bid ---------------- AMZN -1 5/8 59.13 AOL -2 3/4 98.00 T - 5/16 63.69 CHV +1 5/16 77.31 DJT + 1/16 9.31 GM -1 7/8 60.00 INVX - 1/2 23.25 IOM + 3/16 10.31 KLAC -2 1/4 40.75 LU -2 1/8 92.38 MMM - 5/16 87.50 RTN.A - 9/16 53.13 COMS -2 1/16 32.69 TDFX - 3/4 24.50 SPY - 1/16 100.50
Day Month Year History FOOL -1.78% 4.17% -1.87% 229.32% S&P: -0.33% 2.37% 3.41% 118.92% NASDAQ: -0.21% 3.55% 6.79% 132.84% Rec'd # Security In At Now Change 8/5/94 355 AmOnline 7.27 98.00 1247.47% 5/17/95 1960 Iomega Cor 1.28 10.31 705.41% 10/1/96 42 LucentTech 47.62 92.38 94.00% 8/12/96 130 AT&T 39.58 63.69 60.92% 9/9/97 290 38.22 59.13 54.69% 8/11/95 125 Chevron 50.28 77.31 53.75% 8/12/96 110 Minn M&M 65.68 87.50 33.23% 8/12/96 280 Gen'l Moto 48.74 60.00 23.10% 1/8/98 115 S&P Depos. 95.91 100.50 4.79% 12/19/97 17 Raytheon 53.21 53.13 -0.16% 1/8/98 425 3Dfx 25.67 24.50 -4.55% 8/24/95 130 KLA-Tencor 44.71 40.75 -8.86% 4/30/97 -1170 *Trump* 8.47 9.31 -9.96% 6/26/97 325 Innovex 27.71 23.25 -16.09% 8/13/96 250 3Com Corp. 46.86 32.69 -30.25% Rec'd # Security In At Value Change 8/5/94 355 AmOnline 2581.87 34790.00 $32208.13 5/17/95 1960 Iomega Cor 2509.60 20212.50 $17702.90 9/9/97 290 11084.24 17146.25 $6062.01 8/11/95 125 Chevron 6285.61 9664.06 $3378.45 8/12/96 280 Gen'l Moto 13647.92 16800.00 $3152.08 8/12/96 130 AT&T 5145.11 8279.38 $3134.27 8/12/96 110 Minn M&M 7224.44 9625.00 $2400.56 10/1/96 42 LucentTech 1999.88 3879.75 $1879.87 1/8/98 115 S&P Depos. 11029.25 11557.50 $528.25 12/19/97 17 Raytheon 904.57 903.13 -$1.45 1/8/98 425 3Dfx 10908.63 10412.50 -$496.13 8/24/95 130 KLA-Tencor 5812.49 5297.50 -$514.99 4/30/97 -1170*Trump* -9908.50 -10895.63 -$987.13 6/26/97 325 Innovex 9005.62 7556.25 -$1449.37 8/13/96 250 3Com Corp. 11715.99 8171.88 -$3544.12 CASH $11259.61 TOTAL $164659.67