Wal-Mazon.com
AOL and Amazon continue to beat the drum
by Jeff Fischer
(JeffF@fool.com)

ALEXANDRIA, VA (June 23, 1998) -- Like watching paint dry, Amazon rose another 14% today.

No, we're not being smug. Depending on the market's perception of Internet companies, this stock could have just as easily lost 50% since we bought it, rather than rising 385% -- but the market believes that eventual profits are in the Internet's cards, and that Amazon is a serious card player. Add supply and demand to the equation, mix it with a strong market, sprinkle on an army of short sellers, and you have a potion for flight.

Amazon.com (Nasdaq: AMZN) now has a market value nearing $5 billion. That seems difficult to conceive, but it gets easier when you consider that Wal-Mart has a market value of $131 billion and sales of $122 billion. The broad consumer market can obviously support Amazon's valuation, given time, if Amazon is successful.

The risks are substantial. Amazon could achieve $1 billion in sales in the year 2000 and yet trade at a market cap of only $1 billion -- or nearly 80% below today's price -- if it were to trade at one times sales, as does its brethren Borders Group (NYSE: BGP). So why is the current valuation granted? It's not often that you see a paradigm shift so significant that it changes how business, in large part, is done. If the real world is 5.6 billion people spread across seven continents, the Internet is a potential collection of those 5.6 billion people all in one single place. It's a shopping mall large enough for the entire world, and all that you need in order to do business with literally everyone is, well, one simple link.

Following an unthinkable repeat double-digit gain in Amazon (up $11 again today), and the continued ascent of America Online, the Fool Port soared 5% to a new all-time high. Yet, Fools need to remember that we only have an initial $2,500 invested in AOL and $11,000 in Amazon -- both representing far less than 10% of the portfolio at the time of their respective purchases. We don't use margin, we're diversified in several holdings, and we're long-term investors.

If you're just buying your first stock and it's an Internet company, you're not investing so much as you are gambling. To invest, you first need to have a solid foundation on which to invest upon -- the Foolish Four or an index fund, for example. You can't build a tower with only one or two blocks. Twenty years from now your top few investments might very well represent most of the value of your portfolio, but you need the foundation beneath them in the meantime, both in order to hold your riskier investments steady and in case you prove to be incorrect.

Perspective in place, onto the "building block" that has risen highest for us...

America Online (NYSE: AOL) is up nearly $20 since the rumor that AT&T (NYSE: T) offered to acquire the online leader. The acquisition makes sense. Research groups estimate that a majority of communication -- phone and otherwise -- will take place over online networks in the coming five and ten years. AOL was valued at $21 billion during the rumored offering (it's worth $24 billion now), and some analysts suspect that, based on AOL's 13-some million members, a buyout proposal would value the company at between $30 billion and $35 billion. AT&T could swing that.

AOL is up 2,800% for the Fool Port and is, as David stated yesterday, the stock of the decade. It's very likely to top Cisco, Microsoft, Intel, or any of those other so-called -- ahem -- "greats."

Time to flip the record.

This stock has been beaten worse than a rented Chevy, but Innovex (Nasdaq: INVX) finally accelerated today, gaining 15% on three times normal volume. The company is now parked in the same parking lot as 3Com -- the parking lot where earnings estimates are big fat guesses for the next year. Innovex is experiencing a product transition period that is well explained at the end of this recent Web message board post.

Innovex was trading at 5 times trailing earnings before today and yielding 1.10%. It's at 8 times the new September 1999 earnings estimate of $1.51 per share, but that estimate shouldn't even be mentioned, it's such a guess. The company's ability to sell its new HIF product will determine its earnings over the next 15 months. This drama, as it is turning out to be, will end happily for Innovex if disk drive makers care about the cost of components and if Innovex's product can deliver the goods. Innovex has the least expensive solution and it's testing it with potential clients now -- beyond Seagate, a company that is using the product already.

Speaking of 3Com (Nasdaq: COMS), the network laggard will announce earnings tomorrow. Eighteen cents per share is expected. The stock trades at 37 times earnings estimates for the year ending this quarter, and 17 times May of 1999 estimates, which are, again, a big fat guess. Rumors have circulated about a 3Com buyout or merger. Whatever. We'll see. Another dog today, 3Dfx (Nasdaq: TDFX), just released the specs of its coming Banshee 2D/3D product to primarily strong reviews. To read several news stories about it, click here. Meanwhile, the 3Dfx message board on the Fool's website has the best conversation anywhere about the company, and a 3Dfx post is today's Post of the Day.

To close, we can't ignore the fact that Amazon.com and America Online -- valued collectively at $129,000 after growing from an investment of only $13,800 -- now represent 55% of the Fool Portfolio's value. This fact and what to do (or not do) about it will constitute several columns in the future. We'll also share your thoughts on the issue right here (if you have them now, send them along). I believe, though, that you let your winners run. I use Warren Buffett as my largest "case in point" argument -- as well as the fact that, if you always sell portions of your winners, you're always paying taxes, and then by a modest age (if you reinvest your winnings in different companies), you'll also own far too many stocks, many of them probably laggards.

One Fool recently put it best in an e-mail to us. A gentleman named Leonard wrote:

"One thing that always struck me is how just a few of your stocks account for the market-beating results. Only AOL and AMZN have carried the portfolio lately. The others have been, in aggregate, mediocre performers. This just shows that truly outstanding results, which you have produced, come from only a few ideas. Yet these ideas more than make up for the other so-so picks. One of the mistakes that investors make, I think, is to pick ho-hum 'safe' stocks and expect to get superior results. Your approach really highlights the Foolishness of having a couple of brilliant, albeit controversial, ideas and running with them."

Another Fool contributor named Rick added in an e-mail to me that:

"Life is just one investing marathon. Staying in the game is about 90% of making the BIG money. Funny, but most people will never, ever get that concept."

Well, we have no plans to sell after these incredible runs in AOL and Amazon. If large short-term gains amazed us, we would have sold America Online when it hit a 1,000% return for the Fool, and we would have missed the next 1,800%. Instead of that, we continue to think five years ahead and longer. If AOL executes and continues to lead its industry, it's hard to imagine that the company might still be valued at $24 billion after the next five years of Internet growth. According to rumors, at least one large company sees more value than that in AOL right now. Of course, AT&T has been wrong in the past.

Fool on!

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06/23/98 Close

Stock Change Bid ---------------- Stock Change Bid AMZN +11 7/16 92.69 AOL +5 1/8 106.50 T +2 3/8 65.38 DD + 11/16 74.06 DJT + 1/4 7.56 XON +1 3/16 71.81 INVX +1 1/2 13.00 IP - 1/16 43.44 IOM - 1/16 5.50 KLAC + 1/2 27.50 LU +3 5/8 78.38 COMS + 1/8 26.00 TDFX - 1/16 17.13 SPY +1 1/2 111.88
Day Month Year History FOOL +5.19% 21.31% 39.75% 369.02% S&P: +1.48% 2.63% 15.36% 144.22% NASDAQ: +2.14% 3.69% 17.46% 156.13% Rec'd # Security In At Now Change 8/5/94 710 AmOnline 3.64 106.50 2828.69% 9/9/97 580 Amazon.com 19.11 92.69 385.00% 5/17/95 1960 Iomega Cor 1.28 5.50 329.55% 10/1/96 84 LucentTech 23.81 78.38 229.19% 8/12/96 130 AT&T 39.58 65.38 65.18% 2/20/98 215 DuPont 59.83 74.06 23.78% 1/8/98 115 S&P Depos. 95.91 111.88 16.65% 2/20/98 200 Exxon 64.09 71.81 12.05% 4/30/97 -1170*Trump* 8.47 7.56 10.70% 2/20/98 270 Int'l Pape 47.69 43.44 -8.92% 1/8/98 425 3Dfx 25.67 17.13 -33.28% 8/24/95 130 KLA-Tencor 44.71 27.50 -38.49% 8/13/96 250 3Com Corp. 46.86 26.00 -44.52% 6/26/97 325 Innovex 27.71 13.00 -53.08% Rec'd # Security In At Value Change 8/5/94 710 AmOnline 2581.87 75615.00 $73033.13 9/9/97 580 Amazon.com 11084.24 53758.75 $42674.51 5/17/95 1960 Iomega Cor 2509.60 10780.00 $8270.40 10/1/96 84 LucentTech 1999.88 6583.50 $4583.62 8/12/96 130 AT&T 5145.11 8498.75 $3353.64 2/20/98 215 DuPont 12864.25 15923.44 $3059.19 1/8/98 115 S&P Depos. 11029.25 12865.63 $1836.38 2/20/98 200 Exxon 12818.00 14362.50 $1544.50 4/30/97 -1170*Trump* -9908.50 -8848.13 $1060.38 2/20/98 270 Int'l Pape 12876.75 11728.13 -$1148.63 8/24/95 130 KLA-Tencor 5812.49 3575.00 -$2237.49 1/8/98 425 3Dfx 10908.63 7278.13 -$3630.50 6/26/97 325 Innovex 9005.62 4225.00 -$4780.62 8/13/96 250 3Com Corp. 11715.99 6500.00 -$5215.99 CASH $11662.57 TOTAL $234508.26

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