Internet Growth
Tuesday, March 10, 1998
by Jeff Fischer (JeffF@fool.com)

ALEXANDRIA, VA (March 10, 1998) -- Like the Chicago Cubs during a good game, the Fool Port surrendered its early lead and then lost the entire day in the end. Amazon and AOL were hitting for us early, but then both came up lame. Iomega is on the injured list, and it seems that KLA-Tencor and 3Com have been retired for longer than the past year.

The Dow hit a record 8,650 while the S&P touched a never-before-experienced number as well, at 1,064. The Nasdaq jumped but is 35 points below its recent high, at 1,748. The Fool Port crossed the $180,000 mark, reminding Fools of the beauty of compounding. A mere 1,270 days ago, in August of 1994, the portfolio was only worth $50,000. That means that the port has earned, on average, $101 every single day, including weekends, since its launch. Not bad for very minimal effort.

While we used to invest about $6,000 in each Fool Four stock at the beginning, now, due to the portfolio's size, we invest $13,000 in each. In 18 months, when we complete our next Foolish Four switch, we'll probably invest more in each stock. Growth begets growth.

Ok. Enough filler.

Amazon.com (Nasdaq: AMZN) has gained 40% since January 1, growing to a market cap of nearly $2 billion. The company trades at 13.6 times trailing sales of $147 million.

Ten months ago there were an estimated 35 million Web users, and by the year 2000 it's expected that there will be over 150 million (according to a Morgan Stanley Dean Witter report). That firm expects Web retailing to grow aggressively, but to not displace traditional retail sales. It also believes that as fragmented as online retailing is now, eventually only a few leaders will emerge for each sales category. So far, Amazon is the book leader.

What will be interesting going forward is whether or not Amazon can turn book sales into sales of other merchandise, such as CDs, or whether a company like CDnow (Nasdaq: CDNW) will command this niche. My personal preference is that I'd rather use one Web retailer for as many of these kinds of purchases as possible, and I'm most familiar with Amazon.com. In the end, though, it will probably come down to whichever site has the best offerings (and respectable customer service) for each product category.

Looking at CDnow -- with its abundant audio clips available for listening -- makes me wonder how many features Amazon will offer in comparison when it begins to sell music. Will Amazon compete on every level with CDnow, or will it sell music as a "secondary" product, thus not offering as many good services?

We'll see.

Another interesting fact from the MS Dean Witter report is the incredible speed of adoption that the Internet has with consumers. It took radio 38 years to reach 50 million users. Television needed 13 years. Cable needed at least 10 years. It is estimated that the Internet will take only five years to reach the same number of people. Extrapolate that growth forward and the Internet is an opportunity (in "speed" and in possibility for growth) that businesses have never had before.

You can see why Internet companies shouldn't mind losing money now, or for several years, as long as market share is grabbed and retained in the process. Eventually, though, all stocks are valued on earnings. What sort of earnings the Internet will provide is a question mark.

America Online (NYSE: AOL) appears to have the best revenue model to date: it includes commerce, advertising, and subscriptions. AOL is one of the few Internet companies already turning a quarterly profit. The company trades at a market cap of nearly $13 billion, or over 6 times trailing sales. The stock will split 2-for-1 fairly soon. AOL is up 38% this year.

Innovex (Nasdaq: INVX) continues to languish in the wake of a disk drive inventory glut, though our company has been able to turn a quarterly profit with incredible margins despite the slowdown. Our investment in this company is like a movie or a thriller book with a very boring beginning. From now on we'll call Innovex "The Waiting Game." We've got to believe that it's only a matter of time before disk drive orders increase and Innovex is again cranking out more lead-wires and making higher earnings per share.

In the meantime, the company's software joint venture, called Smart Solution, has signed a licensing agreement with Columbia HCA. Innovex expects the division to remain profitable during this fiscal year.

Innovex trades at 10 times fiscal 1998 estimates of $2.05 per share (the year ends in September), and 7 times 1999 estimates of $3.00 per share. The 1999 estimate is a big, fat, gigantic guess, though. Nobody knows what will happen in 1999. Eventually things should pick up, though, and Innovex is a company with 70% of its market (drive makers have nowhere else to go), so it should benefit greatly with any industry upswing. So on we go with "The Waiting Game."

Finally, last year AT&T (NYSE: T) soared on news of a new CEO, but the stock has since cooled, understandably. This year Mr. Armstrong, the CEO, aims to cut SG&A expenses by some $1.6 billion in absolute terms from last year. Half of this cost-savings will come from layoffs, the other half from operations. AT&T wasn't running quite as "leanly" as it could have been over the past years. The flat stock price for half a decade supports that fact.

Since January 1, Ma Bell stock has gained over 7%. AT&T trades at 19 times 1998 earnings estimates of $3.27 per share.

If you're looking for any stock or Fool-related products, gifts or services, please browse through FoolMart. We offer a free service, but we need to pay the bills somehow. Plus, there are some pretty cool and very affordable things in there. (Place a fun purchase order, or else just click on our ad banners more often, too. That helps!) Last but far from least, if you read any good articles about Fool companies on other websites, please send a link to me. I'll try to share the articles with readers.

Have a Foolish evening!

--Jeff Fischer

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TODAY'S NUMBERS

Stock Change Bid ---------------- AMZN - 1/2 82.88 AOL - 9/16 123.00 T +1 7/16 62.69 DD + 1/8 63.81 DJT + 1/16 10.00 XON + 15/16 63.44 INVX + 13/16 21.81 IP + 3/8 50.44 IOM - 1/16 8.44 KLAC + 9/16 39.19 LU + 15/16 108.31 COMS - 1/8 34.81 TDFX + 9/16 24.81 SPY +1 106.56
Day Month Year History FOOL +0.37% 1.35% 7.38% 260.36% S&P: +1.14% 1.42% 9.67% 132.17% NASDAQ: +1.35% -1.24% 11.35% 142.79% Rec'd # Security In At Now Change 8/5/94 355 AmOnline 7.27 123.00 1591.22% 5/17/95 1960 Iomega Cor 1.28 8.44 558.97% 10/1/96 42 LucentTech 47.62 108.31 127.47% 9/9/97 290 Amazon.com 38.22 82.88 116.83% 8/12/96 130 AT&T 39.58 62.69 58.39% 1/8/98 115 S&P Depos. 95.91 106.56 11.11% 2/20/98 215 DuPont 59.83 63.81 6.65% 2/20/98 270 Int'l Pape 47.69 50.44 5.76% 2/20/98 200 Exxon 64.09 63.44 -1.02% 1/8/98 425 3Dfx 25.67 24.81 -3.33% 8/24/95 130 KLA-Tencor 44.71 39.19 -12.35% 4/30/97 -1170*Trump* 8.47 10.00 -18.08% 6/26/97 325 Innovex 27.71 21.81 -21.28% 8/13/96 250 3Com Corp. 46.86 34.81 -25.72% Rec'd # Security In At Value Change 8/5/94 355 AmOnline 2581.87 43665.00 $41083.13 5/17/95 1960 Iomega Cor 2509.60 16537.50 $14027.90 9/9/97 290 Amazon.com 11084.24 24033.75 $12949.51 8/12/96 130 AT&T 5145.11 8149.38 $3004.27 10/1/96 42 LucentTech 1999.88 4549.13 $2549.25 1/8/98 115 S&P Depos. 11029.25 12254.69 $1225.44 2/20/98 215 DuPont 12864.25 13719.69 $855.44 2/20/98 270 Int'l Pape 12876.75 13618.13 $741.38 2/20/98 200 Exxon 12818.00 12687.50 -$130.50 1/8/98 425 3Dfx 10908.63 10545.31 -$363.31 8/24/95 130 KLA-Tencor 5812.49 5094.38 -$718.12 4/30/97 -1170*Trump* -9908.50 -11700.00 -$1791.50 6/26/97 325 Innovex 9005.62 7089.06 -$1916.56 8/13/96 250 3Com Corp. 11715.99 8703.13 -$3012.87 CASH $11233.54 TOTAL $180180.17