Stone Age of Now
Plus, Starbucks, AOL, Lucent, Amazon

by Jeff Fischer (TMFJeff@aol.com)

ALEXANDRIA, VA (Oct. 2, 1998) -- What a wild market. You know the story. International woes. Volatility. It could continue for years. No matter, though, in the end. Invest in great companies. And for the long term.

Here we are in the Stone Age of technology. In the year 2098, people will look back at 1998 in the same way that we look back to 1898: "How archaic, how uncivilized, how [Insert brash laughter here] they lived liked savages! Oh... and look how the Dow was at 40. Ahem. [Shuffle feet, look down.] My family didn't invest?"

The Dow closed at 7,810 on Friday, up sharply after being as low as 7,530 earlier in the day -- that's a 3.7% swing.

The S&P gained 1.6% Friday, the Nasdaq was flat, and the Fool Port gained 5%. For the week, though, the Fool lost 4.2%, the S&P blew a tire for 4%, and the Nasdaq plummeted (fun word) 7%. Being a tech-heavy portfolio, the Fool fared this week's storm well. The port is up 39% this year versus 3% for the S&P.

That's Foolish.

Stone Age of Technology?

Bear Stearns initiated coverage of Amazon.com (Nasdaq: AMZN) with a "buy" rating on Friday, setting a $160 price target. With Amazon already valued at $5.5 billion, the buy rating is arguably bold, but the $160 price target takes bold to a new level -- it assumes an $8 billion value for Amazon. "Is they dummies over there, or what?" you might ask. Or does Bear Stearns actually have logic behind its target price?

Wish we knew.

Bear Stearns cited the likelihood of a strong fourth quarter, which is no surprise and is not a reason by itself to issue a buy. Instead, the firm must be taking a long-term approach to the stock, or so I'd assume. Either way, perhaps Bear Stearns should be commended for having the courage to issue the buy at these prices, or perhaps we might ask what took them so long.

Amazon could have sales of about $450 million this year and the stock trades at nearly 12 times those sales. It's hard to believe, but the Fool has owned the stock for over a year. "Remember when it was valued at $800 million, not $5.5 billion?"

Once the love of the market, but now shunned (temporarily anyway), Lucent Technologies (NYSE: LU) continued to decline following analyst downgrades this week. The company recently stated that it was comfortable with existing earnings estimates and projected growth rates. The stock is more than 40% below its recent high. Lucent is now trading at 37 times 1998 earnings estimates and 31 times next year's projections, while being expected to grow earnings 20% next year.

America Online (NYSE: AOL), already into fiscal 1999, trades at 101 times earnings estimates for this year and 64 times estimates for fiscal 2000, while expected to grow earnings over 57% annually for the next five years. The stock, as we've discussed here several times, is commonly valued by analysts and Foolanalysts at around $150 per share. That's based on fiscal 1999 estimates across the board (valuing subscribers, commerce deals, the network, and so forth).

Stone Age of Coffee?

Starbucks (Nasdaq: SBUX). Does the name ring a bell? What do you think of when you hear "Starbucks"?

The stock rose following yesterday's news of year-end sales (yesterday's column, by the way, also discussed falling stock markets).

Starbucks is doing so much that you could write a book about it. In fact, one has been written. But today we have highlights from the analyst conference held Monday:

First, Starbucks knows that it doesn't give customers enough reason to return to stores in the afternoon. Hence, it's adding sandwiches to the menu at certain locations. With much joy, I report that the Starbucks in Alexandria, VA, announced today that it is adding a lunch menu. YES. I will no longer be living on coffee alone, and these columns will become smoother, less choppy. Less caffeine imbued. Thank you.

An entirely new concept beyond just sandwiches: The first Cafe Starbucks opened in Seattle and is doing well. It has a full menu, breakfast to dinner. It's unlikely that there will be more than 10 locations in the next year, however, and those will only come about after more testing. In the long run, if it works, these stores will complement the existing small "coffee-only" Starbucks stores. You can open Cafe Starbucks in a city with several existing small Starbucks stores. The two concepts serve different purposes, but under the same mission: offer great coffee.

Incidentally, the Cafe Starbucks has been selling more espresso drinks than traditional Starbucks locations. (Cha-ching.)

Circadia Coffeehouses: this hasn't yet been announced. It's been kept quiet. The first location should open in New York City soon. The concept is aimed at younger generations. The coffeehouses will be large with a strong music and art component, while offering couches, more lounging, Internet access, and coffee-liquor drinks. They will also serve all three meals. Again, a test rollout of up to 10 locations is possible in 1999 if the concept works.

More new information: Much as Starbucks has a relationship with Barnes & Noble (a very successful one), it now has a new and similar relationship with Blockbuster Video.

Growth plans: Starbucks has over 1,700 locations in continental North America and over 120 overseas. In 10 years, the company expects to have more international locations than domestic. As we know, it aims to first have 500 in Asia and 500 in Europe by the year 2003. North America consumes only 18% of the world's coffee. (Starbucks to world: "Hello, world. Pleased to meet you.")

Starbucks entry into the grocery channel's whole bean market in 3,500 Western locations has grown the market for specialty coffee some 25%. Kraft will help Starbucks sell in grocery channels across the country, and perhaps internationally.

Bottled Frappuccino: $20 million in sales in 1995. $370 million in sales in 1998. Starbucks has 90% market share of cold bottled coffee sales in this country. This could be a multi-billion dollar market domestically.

The Internet: The company's official website will launch this month. The demonstration of it at the conference was flawless. It didn't crash once. Bill Gates, take note.

A new 24 oz. sized coffee will likely be offered, upping the current large size that is 20 oz. The 24 oz. size was tested successfully in Texas. (But hey, that's Texas!)

Bundling: people like it. Offer a "coffee of the day" with a "pastry of the day" and charge a lower price. Starbucks will.

An entire new tea line will be offered in Q2, Q3, 1999. Nobody should be disappointed. Starbucks already has been praised for its tea. This new line... even better. Also coming: new music, new holiday promotions, new hardware for sale, new espresso machines, chocolates, snack bars, candy bars...

Check out the newly emerging Boring Port philosophy, and have a Foolish weekend!

--Jeff Fischer

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10/02/98 Close

Stock Change Bid ---------------- AMZN +7 5/8 110.25 AOL +7 1/4 107.13 T +1 3/8 58.63 DJT --- 3.38 DD +1 7/16 55.13 XON +1 49/51 73.00 INVX + 5/16 11.63 IP + 7/16 45.31 IOM --- 3.63 KLAC - 7/8 22.63 LU -2 11/16 63.31 SBUX +3 7/16 36.50 COMS + 5/8 30.13 TDFX - 5/16 10.81
Day Month Year History Annualized FOOL +5.00% -2.13% 39.58% 368.43% 44.96% S&P: +1.64% -1.42% 3.32% 118.72% 20.71% NASDAQ: +0.16% -4.66% 2.84% 124.25% 21.43% Rec'd # Security In At Now Change 8/5/94 710 AmOnline 3.64 107.13 2845.88% 9/9/97 580 Amazon.com 19.11 110.25 476.90% 5/17/95 1960 Iomega Cor 1.28 3.63 183.11% 10/1/96 84 LucentTech 23.81 63.31 165.93% 4/30/97 -1170*Trump* 8.47 3.38 60.15% 8/12/96 130 AT&T 39.58 58.63 48.13% 2/20/98 200 Exxon 64.09 73.00 13.90% 2/20/98 270 Int'l Pape 47.69 45.31 -4.99% 2/20/98 215 DuPont 59.83 55.13 -7.87% 7/2/98 235 Starbucks 55.91 36.50 -34.72% 8/13/96 250 3Com Corp. 46.86 30.13 -35.72% 8/24/95 130 KLA-Tencor 44.71 22.63 -49.40% 1/8/98 425 3Dfx 25.67 10.81 -57.87% 6/26/97 325 Innovex 27.71 11.63 -58.05% Rec'd # Security In At Value Change 8/5/94 710 AmOnline 2581.87 76058.75 $73476.88 9/9/97 580 Amazon.com 11084.24 63945.00 $52860.76 4/30/97 -1170*Trump* -9908.50 -3948.75 $5959.75 5/17/95 1960 Iomega Cor 2509.60 7105.00 $4595.40 10/1/96 84 LucentTech 1999.88 5318.25 $3318.37 8/12/96 130 AT&T 5145.11 7621.25 $2476.14 2/20/98 200 Exxon 12818.00 14600.00 $1782.00 2/20/98 270 Int'l Pape 12876.75 12234.38 -$642.38 2/20/98 215 DuPont 12864.25 11851.88 -$1012.38 8/24/95 130 KLA-Tencor 5812.49 2941.25 -$2871.24 8/13/96 250 3Com Corp. 11715.99 7531.25 -$4184.74 7/2/98 235 Starbucks 13138.63 8577.50 -$4561.13 6/26/97 325 Innovex 9005.62 3778.13 -$5227.50 1/8/98 425 3Dfx 10908.63 4595.31 -$6313.31 CASH $12005.75 TOTAL $234214.94

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