Amazon and 3Dfx
Friday, May 01, 1998
by Jeff Fischer (JeffF@fool.com)

ALEXANDRIA, VA (May 1, 1998) -- One year ago the 30 Dow Jones Industrial stocks were valued at a collective 1.445 trillion dollars. Today the 30 stocks are worth 2.191 trillion dollars, a 700 billion dollar increase in one year. In that time, the Dow has risen from 7030 to 9100. The average Dow stock has a market value of $73 billion, with the lowest value granted to Union Carbide at under $7 billion. The largest companies, by market cap, are General Electric and Coca-Cola, at $278 and $188 billion respectively.

When the Dow broke 9000 in early April, it made headline news even in Portugal. The U.S. market leads the markets of the world, with the Dow as its knight in shining armor. An interesting fact (for fact buffs) is that in 1939, AT&T was added to the Dow, replacing IBM. If this switch wasn't made, the Dow would have surpassed 1000 in 1961 instead of in 1972, and would be much higher today.

IBM was then added back to the Dow in 1979, just six years before the beginning of a ten-year dry spell for the stock. So, IBM has twice slowed down the Dow -- once by being absent from the Index, and again by being present. The good folks at Dow Jones are probably finished trying to "time" IBM's participation in the index.

Whatever happens, these circumstances help to remind us that the 1000 point milestones that the media always focuses on are all but meaningless, because they're circumstantial. They only matter relative to the underlying valuation of the Dow, of course, which is the one thing the media rarely -- if ever -- addresses with much integrity. Instead it likes to simplify things by saying, "Look how high the Dow has come. It's up another 1000 points in six months." Stuff like that. Meantime, we would have passed 10,000 long ago had IBM been kept in the index since 1939 -- or not added back, perhaps, in 1979.

Anyway, all of this trivia arises from the fact that we're working on a Foolish Four primer for FoolMart. The primer outlines the Foolish Four investment approach, explains its variations, and offers historical returns for different holding periods, among several other items. It won't be available for another month or so, and we'll share more details later -- closer to the launch. Apologies for the tease, but I felt that some of it was interesting.

The Portfolio. The Fool Port began the new month with verve, gaining over 2% on strength almost across the board, while savoring weakness in our one short, Trump Hotels. Exxon rose on Friday due to an analyst upgrade to "buy," and America Online made another new high. The Fool Port is now nearly nine percentage points ahead of the S&P 500 for the year.

David Gardner was cruising the message boards recently, and he wanted to share the following comments regarding a press release that we didn't write about last week on the day when it happened. David writes:

"We've recently gotten e-mails from a number of readers asking about our thoughts on an announcement put out by Amazon a week ago today. The company announced on 4/24 that it would be raising $275 million in senior discount notes. That's an issuance that would net the company $275 million now, which AMZN would begin paying back with interest in 2003 through to completion in 2008.

"The press release mentions that the company does not intend to register the offering in accordance with the Securities Act of 1933, meaning that unless Amazon seeks an exemption, the notes will be sold outside the U.S. This has caused a great deal of speculation (often, on the part of short sellers) that Amazon is trying to hoodwink people, or can't qualify for U.S. debt, or is selling out equity holders because it'll be unable to pay off this debt down the line.

"We called Amazon's investor relations to find out more, but Kay Dangaard said that due to SEC regulations regarding this type of filing she can't at present discuss or explain the notes. This is the 'quiet period' until after the offering is done and put to sleep. But not wanting to speak 'out of school,' Ms. Dangaard gave our phone number to Amazon's head of investor relations who will be calling us when he returns to the office (he's out of town).

"Anyway, from our point of view, the hubbub on our message boards about this filing is mostly sound and fury signifying nothing. The offering is being done by Morgan Stanley Dean Witter -- which carries its own repute -- and the proceeds will be used in part to pay off existing indebtedness. If you're the sort of skeptic who believes Amazon has a failed business model and will come to nothing in the end, you'd probably contend that this offering is a sign of great weakness foretelling doom in the end. For the rest, I'd encourage us to regard this as a smart move that keeps equity holders from being diluted and one that our company will have no difficulty paying off starting five years from now.

"Foolish bottom-line: File this one under 'Non-Event.' "

Even so, as we hear more from Amazon we'll share it. Our aim is to build a healthy working relationship with the company's investor relations department. By the way, Dale Wettlaufer wrote about Amazon.com in the Fool's Evening News column on Friday.

The other "story of the week" involves 3Dfx Interactive (Nasdaq: TDFX). The stock declined another three dollars this week on top of a six dollar decline the week before -- after reporting excellent earnings.

We've offered several possible explanations for the decline, but one likely set of reasoning comes from a market "insider" who sent us an email following Wednesday's Fool column. The reasoning is as follows:

3Dfx recently did a secondary offering in which the underwriters were Robertson Stephens, UBS, and Montgomery Securities. Stephens is on the block to be sold, though, meaning that many employees are looking for jobs elsewhere, and the semiconductor analyst at this company was one of the largest proponents of 3Dfx. That support is currently gone, it is thought. Next, UBS Securities is basically out of the picture due to a merger and the fact that the analyst covering 3Dfx there left for DLJ Securities. He was the second largest proponent of 3Dfx, but he's no longer in that position.

That leaves Montgomery Securities, but the 3Dfx analyst there doesn't support the stock with any serious conviction. Finally, the email that we received states, "A block of [3Dfx] stock recently came through a market maker and the instructions were to sell it with no limit. The sales drove the stock down quickly. Everyone knows that at this time there is no large house supporting the stock. That plus the imbalance of the restricted stock is causing this."

If the above does indeed represent the bulk of the explanation for the stock's decline, then it has nothing to do with the company's fundamentals and this should hopefully be a short-term blip. This might say something about the company's ability to find good uderwriters, though. What 3Dfx needs to do now is hit the road and kiss some XXX [Foolishly censored by the author] to get more investment house coverage for its stock. Arguably the stock deserves attention for what the company has accomplished. At $23 per share, 3Dfx is trading at 12 times earnings estimates while the company has grown net income (not to mention sales!) several hundred-fold each of the past three quarters.

Is this quick slide in the stock a non-event? Obviously not. It's a big event. But apparently it doesn't involve 3Dfx's business -- just the politics behind the stock. So hopefully this will, in time, be a non-event. In the meantime, this is another take on what has been an intriguing slide. At some point we'll hopefully know for certain what is behind it.

Have a Foolish weekend!

--Jeff Fischer

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TODAY'S NUMBERS

Stock Change Bid ---------------- AMZN +2 5/8 94.25 AOL +3 9/16 83.50 T + 5/8 60.75 DD +2 3/8 75.19 DJT - 1/8 8.13 XON +2 11/16 75.75 INVX - 1/16 25.38 IP + 3/8 52.56 IOM - 1/8 7.75 KLAC + 1/4 40.44 LU -1 3/16 75.06 COMS - 3/16 34.06 TDFX - 13/16 23.13 SPY +1 1/4 112.59
Day Month Year History FOOL +2.16% 2.16% 24.17% 316.73% S&P: +0.83% 0.83% 15.52% 144.55% NASDAQ: +0.27% 0.27% 19.30% 160.13% Rec'd # Security In At Now Change 8/5/94 710 AmOnline 3.64 83.50 2196.20% 5/17/95 1960 Iomega Cor 1.28 7.75 505.28% 10/1/96 84 LucentTech 23.81 75.06 215.28% 9/9/97 290 Amazon.com 38.22 94.25 146.59% 8/12/96 130 AT&T 39.58 60.75 53.50% 2/20/98 215 DuPont 59.83 75.19 25.66% 2/20/98 200 Exxon 64.09 75.75 18.19% 1/8/98 115 S&P Depos. 95.91 112.59 17.40% 2/20/98 270 Int'l Pape 47.69 52.56 10.21% 4/30/97 -1170*Trump* 8.47 8.13 4.06% 6/26/97 325 Innovex 27.71 25.38 -8.43% 8/24/95 130 KLA-Tencor 44.71 40.44 -9.56% 1/8/98 425 3Dfx 25.67 23.13 -9.91% 8/13/96 250 3Com Corp. 46.86 34.06 -27.32% Rec'd # Security In At Value Change 8/5/94 710 AmOnline 2581.87 59285.00 $56703.13 9/9/97 290 Amazon.com 11084.24 27332.50 $16248.26 5/17/95 1960 Iomega Cor 2509.60 15190.00 $12680.40 10/1/96 84 LucentTech 1999.88 6305.25 $4305.37 2/20/98 215 DuPont 12864.25 16165.31 $3301.06 8/12/96 130 AT&T 5145.11 7897.50 $2752.39 2/20/98 200 Exxon 12818.00 15150.00 $2332.00 1/8/98 115 S&P Depos. 11029.25 12948.28 $1919.03 2/20/98 270 Int'l Pape 12876.75 14191.88 $1315.13 4/30/97 -1170*Trump* -9908.50 -9506.25 $402.25 8/24/95 130 KLA-Tencor 5812.49 5256.88 -$555.62 6/26/97 325 Innovex 9005.62 8246.88 -$758.75 1/8/98 425 3Dfx 10908.63 9828.13 -$1080.50 8/13/96 250 3Com Corp. 11715.99 8515.63 -$3200.37 CASH $11558.06 TOTAL $208365.03

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