<THE FOOL PORTFOLIO>
AOL and Amazon
Hydra companies -- SNAP SNAP! Snap!

by Jeff Fischer (TMFJeff@aol.com)

ALEXANDRIA, VA (Nov. 24, 1998) -- How quickly things change!

I last wrote this column one week ago, but judging from the portfolio's performance since that time, you'd think it'd been several years.

On November 16, the Fool Port was ahead 71% since January, and 475% since its inception. Today, the portfolio closed up 119% for '98 and 635% historically. Amazon has surged from $126 last Monday to $214 today. AOL advanced from $73 to $91. What's going on?

Let's just say: A little excitement.

When David wrote that investing in Rule Breaking stocks requires, at best, a loose definition of "fair valuation," he didn't mean that we throw valuation out the window. The key word he used that probably should have been underlined was traditional. Valuation using traditional measures doesn't serve to define new companies that are growing in more directions than a mythical Hydra has heads. Traditional valuations don't play out in Rule Breaking situations because the industry or business that Rule Breakers operate in is new, untested, and unknown -- and very rapidly growing. Slapping a P/E on a company like AOL made no sense during this entire decade, because what mattered was the company's membership growth and the value of its network and business relationships.

Rapid growth in several directions is propelling Amazon.com (Nasdaq: AMZN) and America Online (NYSE: AOL), as well as other leading Internet stocks. E-commerce revenue is new and already massive at AOL, with $600 million in contract backlogs. This wasn't anticipated just two years ago. Now the stock market is trying to extrapolate these results into future years.

Only 25% of Americans have online access in their homes, and an estimated 60 million people in North America use the Internet. Despite the fact that e-commerce will be a multi-billion dollar industry this year, most people have not yet shopped online. Retail sales on the Internet could top $13 billion in '98, but that's less than 1% of the total U.S. retail market. By the year 2002, at least 120 million people will be online. And by 2008, up to 90% of all Americans could share the Web with us, just as 98% own televisions and 90% VCRs.

The stock market is trying to account for future growth that promises to be more rapid than any other medium has ever experienced. Plus, it's trying to account for things that this medium offers that no other ever has. The mediums of the past (print, radio, television) allowed information sharing and advertising, but not live transactions (immediate commerce), and certainly not "intelligent suggestions." Intelligent suggestions are what Amazon offers whenever you buy a product -- it shows other products you might like. They're just one click away.

With new products just "one click away," new stock valuations can be "one click" away as well. The moment that Amazon began to sell software, electronic goods, and other gifts at its site, the company's revenue model was subtly altered, and everyone's definition of the company needed to adjust, too. In one day, the book and music seller expanded its market by adding one extra page: computer games. And another page: toys. And one large area: videos. Off-line this can't be done without serious investments in real estate and inventory; Amazon did this without much investment in either. Instead, it invested in technology and people.

Next, consider geographic expansion. Borders (NYSE: BGP) needed several years to address international markets. Amazon already runs the leading online booksellers in England and Germany, and it hardly needed to leave Seattle in order to do so. The Internet is the first medium that is instantly worldwide, everywhere, and inexpensively. It's now possible for any small company to become a major worldwide brand and even a world leader in its market in very short order. As David Gardner said yesterday, "We'll probably never see wealth created (and destroyed) this quickly again in our lives." He was speaking of now and of the next several years. It's not often that one witnesses the birth of a new industry, especially one that addresses the entire world instantly and with multiple capabilities (content, transactions, advertising). It's taken Coca-Cola over 100 years to get product in 10% of the places that the Internet reaches.

Where might Amazon go next? Fool Thom Unger shared several URL domain names that Amazon already owns. They include BOOKCHAT, FILMCHAT, MUSICCHAT, MUSICCHAT2, AMAZONTV, AMAZONTELEVISION, AMAZONTUBE, AMAZONKIDS, AMAZONJUNIOR and others. Obviously, the company could introduce chat functions.

"Chat" is shown to greatly improve a website's results. Studies show that the average visit to a website lasts 7 minutes. If a site has chat, however, the average visit jumps to nearly 30 minutes in length, and the number of visits per week rises as much as 50% in some cases. Studies also show that chat participants are likely to buy much more from a site: $50 per order versus $30 for non-chat visitors. Imagine that you're in an Amazon chat and everyone is raving about a new book. It's easy to see why chat helps a community and a commercial website.

Regarding the quickly-changing Internet landscape, Netscape (Nasdaq: NSCP) as we knew it is history. America Online announced a $4.2 billion stock purchase of the browser leader, a purchase that in retrospect isn't incredibly surprising. The deal generally makes sense. We listened to the conference call this morning.

After being completed in the spring, the deal will be modestly accretive to AOL's earnings next year. Netscape gives AOL strong worldwide presence and possession of another leading Internet brand that addresses different markets; Netscape.com and AOL.com rival Yahoo! for market share. AOL also views Netscape's Website as integral in growing its e-commerce business. Netscape's portal strategy has resulted in strong advertising and commerce-related revenue growth. (By the way, today it was announced that Amazon will be the featured commerce site on Microsoft Network.)

The main concern from critics of the deal surrounds AOL's acquisition of Netscape's enterprise software business. AOL said it can use the technology, however. Meanwhile, Netscape will remain a separate operation, like CompuServe, and overall AOL believes the acquisition is highly complementary.

America Online nabbed Netscape at a price less than 10% of AOL's market value, making Steve Case and company happy with the price tag. Netscape came public on August 10, 1995, in an IPO performance that rivaled any before theglobe.com (Nasdaq: TGLO) topped it this month. Netscape closed its first day at a split-adjusted $26, and later reached an all-time high of $87 on December 10, 1995. America Online is paying less than half that price. Today Netscape announced quarterly earnings of $2.7 million, down from last year.

Regarding the mythical Hydra again: perhaps we should call Rule Breakers hydra, not capitalized. The definition of hydra -- as opposed to Hydra -- is "a multifarious evil not to be overcome by a single effort." Rule Breakers aren't often evil, but they're certainly not overcome (or defined) with singular effort. In ten years, you might watch many of your favorite television shows at Amazon.com.

Fool on!

P.S. Last week, Brian Graney (TMF Panic) and I spoke with Douglas Keller of Innovex (Nasdaq: INVX). For the interview, please click here.

Order your copy of David and Tom Gardner's new book, Rule Breakers, Rule Makers, in advance. This Simon & Schuster beauty doesn't arrive until January, but you can reserve your copy today! The first half of the epic book, on Rule Breakers, elucidates the Fool Port's investment style; the second half, on Rule Makers, further explains Cash-King investing.

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Bookmark Live Fool Port Quotes

11/24/98 Close

Stock Change Bid ---------------- AMZN -3 1/2 214.50 AOL +2 1/4 91.88 T -1 3/16 62.69 DJT + 1/16 5.00 DD - 9/16 60.00 XON + 11/16 72.69 INVX + 1/16 16.06 IP -1 11/16 44.00 IOM - 9/16 7.38 KLAC +1 9/16 39.44 LU +1 13/16 90.19 SBUX + 3/4 46.75 COMS -2 39.94 TDFX + 13/16 13.38
Day Month Year History Annualized FOOL -0.06% 36.91% 119.03% 635.06% 58.96% S&P: -0.44% 7.67% 21.90% 158.07% 24.64% NASDAQ: -0.58% 10.98% 25.19% 172.97% 26.28% Rec'd # Security In At Now Change 8/5/94 1420 AmOnline 1.82 91.88 4953.02% 9/9/97 580 Amazon.com 19.11 214.50 1022.40% 5/17/95 1960 Iomega Cor 1.28 7.38 475.99% 10/1/96 84 LucentTech 23.81 90.19 278.81% 8/12/96 130 AT&T 39.58 62.69 58.39% 4/30/97 -1170*Trump* 8.47 5.00 40.96% 2/20/98 200 Exxon 64.09 72.69 13.41% 2/20/98 215 DuPont 59.83 60.00 0.28% 2/20/98 270 Int'l Pape 47.69 44.00 -7.74% 8/24/95 130 KLA-Tencor 44.71 39.44 -11.80% 8/13/96 250 3Com Corp. 46.86 39.94 -14.78% 7/2/98 235 Starbucks 55.91 46.75 -16.38% 6/26/97 325 Innovex 27.71 16.06 -42.03% 1/8/98 425 3Dfx 25.67 13.38 -47.89% Rec'd # Security In At Value Change 8/5/94 1420 AmOnline 2581.87 130462.50$127880.63 9/9/97 580 Amazon.com 11084.24 124410.00$113325.76 5/17/95 1960 Iomega Cor 2509.60 14455.00 $11945.40 10/1/96 84 LucentTech 1999.88 7575.75 $5575.87 4/30/97 -1170*Trump* -9908.50 -5850.00 $4058.50 8/12/96 130 AT&T 5145.11 8149.38 $3004.27 2/20/98 200 Exxon 12818.00 14537.50 $1719.50 2/20/98 215 DuPont 12864.25 12900.00 $35.75 8/24/95 130 KLA-Tencor 5812.49 5126.88 -$685.62 2/20/98 270 Int'l Pape 12876.75 11880.00 -$996.75 8/13/96 250 3Com Corp. 11715.99 9984.38 -$1731.62 7/2/98 235 Starbucks 13138.63 10986.25 -$2152.38 6/26/97 325 Innovex 9005.62 5220.31 -$3785.31 1/8/98 425 3Dfx 10908.63 5684.38 -$5224.25 CASH $12005.75 TOTAL $367528.06

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