<THE RULE BREAKER PORTFOLIO>

Amazon isn't Toying Around
...will it eat eToys' lunch?

by Jeff Fischer (TMFJeff)

ALEXANDRIA, VA (July 13, 1999) -- On June 11, 1998, Amazon (Nasdaq: AMZN) added music to its site. On March 30, 1999, auctions were placed on the Amazon block. Today, the company plugged into new markets that achieve over $70 billion in combined annual sales. Toys, games, and electronic products were plugged into the Amazon mix after more than one year of planning and creating -- for, contrary to appearances, all Amazon product offerings are planned meticulously.

The addition of these product offerings arrives well in time for the December selling season -- well in time for any quirks to be ironed out. How will sales be impacted? Recent estimates predict that Amazon's revenue will reach $1.2 billion to $1.4 billion this year. I believe that $1.7 to $1.9 billion is more likely.

Amazon achieved $293 million in first quarter '99 revenue. In the past three years, quarter four revenue averaged over three times that of quarter one revenue. If this holds true, quarter four revenue alone could top $850 million this year. Seeing how 60% of annual toy sales and 30% of yearly electronic sales occur in the fourth quarter, both categories could contribute meaningfully to Amazon's year-end results. Add $900 million in sales for quarters one through three, and Amazon could achieve $1.75 billion in 1999 revenue.

Yes, I know. And zero earnings.

However, the company is cash flow positive and it is able to fund much of its operational growth via its customer-generated cash flow. So, the faster that sales grow (creating more positive cash flow), the better. As for net income: that is what all young companies strive to obtain. It usually takes many years. Especially in retail. Let it take years. It is vital that Amazon continues its aggressive land-grab now, rather than see profits, if it wishes to maximize its future scope and size. It must move -- and spend -- now, and with sure-footed speed.

Moving quickly succeeded with music and videos. Amazon became the online leader. Will this happen with toys, electronics, and games? It could. Amazon has over 10 million registered customers. As of March 30, 1999, eToys (Nasdaq: ETYS), the leading online toy competitor, had only 365,000 customers, while electronic product sales are scattered over many Websites. (As a side-note, today music seller CDnow (Nasdaq: CDNW) agreed to merge with Columbia House amidst a declining cash balance. Some call the merger a concession of defeat.)

Alongside a size advantage, toys, games and electronics should have much more immediate traction at Amazon because they are traditional retail products. They don't demand a significant behavior change, or "leap of habit," from Amazon customers. A leap was required to persuade customers to use Amazon auctions. That's partially why the auction site at Amazon hasn't taken the world by storm. Users view Amazon as a retail site. That is its mindshare. eBay (Nasdaq: EBAY) commands mindshare for auctions. (eBay must stop crashing or it will command mindshare of a different sort: that of being unreliable.)

Amazon: books, music, videos, toys, games, electronics, auctions, drugs, pets, groceries. And the company is valued at $20 billion. What will sales reach in ten years?

Rather than ponder that, many critics worry about Amazon's inventory needs. Whatever those needs become, operating an online-only store should keep inventory costs much lower than those of scattered, off-line retailers. As for current inventory space, Amazon already has 10 times the storage capacity that it had last year, at 3.5 million square feet. It plans to distribute most toys, games and electronics directly, and it will still have inventory space remaining.

We'll see quarter two results from Amazon and many other companies soon.

Earnings Dates
AMZN 7/21 
AOL  7/22
ATHM 7/20
EBAY 7/26 
IOM  7/14
SBUX 7/22 
TDFX 8/23

Amgen (Nasdaq: AMGN) announced earnings early to quell the good rumors. Results clobbered expectations. Revenue grew 25% to $738 million and earnings per share rose 21% to $0.50, topping the $0.46 estimate by 8.6%. The $72 stock is at 37 times the new estimates of $1.95 per share in '99 earnings.

Amgen's pipeline, or drugs in the making, is offered on its Website. Stemgen should be approved in 1999. Also, Amgen is the focus of tonight's Fool on the Hill column by Warren Gump. A recent Motley Fool Industry Snapshot focused on the Biotech industry and its key companies, too. This research was written by Warren Gump as well. At 10 pages in length, the detailed report on the industry and its leaders will sell for $7.00 in FoolMart. It will be available here soon. Check out other Industry Snapshot issues in the meantime: online brokers, ISPs, and many more, each one less than the price of a movie ticket: seven bucks. (By the way, "Snapshot" is a misleading name in that it connotes "brief." These are focused but detailed reports.)

Starbucks (Nasdaq: SBUX) is at 46 times its new 1999 earnings guidance of $0.54 per share. The company's online initiatives introduced uncertainty into the earnings model, as we've already witnessed. One needs to be a long-term investor in the coffee leader now more than ever -- because short-term, anything can happen. Is the stock poised to beat the market at this price? Thoughts are shared in this Foolish Starbucks special.

Finally, continuing to build its Web-based offerings, Excite@Home (Nasdaq: ATHM) will buy iMall (Nasdaq: IMAL) for $425 million in stock. iMall -- or "IMall" -- provides e-commerce platforms for small and medium-sized businesses wanting to sell wares online. Finally, again, tomorrow Iomega (NYSE: IOM) should share second quarter results. Finally, a third time: Donald Trump of Trump Hotels (NYSE: DJT) said he might run for President of the United States. His stock fell.

Focus on the long term, not the quarter-to-quarter. Fool on!

-Jeff Fischer

07/13/99 Close

Stock  Change    Bid 
------------------ 
AMGN  +6         72.31
AMZN  +8 3/4    126.13
AOL   +2 3/4    124.88
ATHM  -1 9/16    49.94
CAT   -1 1/8     59.88
CHV   -1 13/16   97.13
DD    +2 1/2     73.00
DJT   -  3/16     5.44
EBAY  -2 7/8    125.00
GT    -  5/16    58.00
IOM   -  1/8      4.63
SBUX  +  1/2     25.63
TDFX  +  5/16    15.06

                  Day     Month  Year   History   Annualized 
      R-BREAKER  +2.94%   3.45%  33.09% 1235.83%   69.06%
        S&P:     -0.40%   1.51%  13.95%  218.26%   26.43%
        NASDAQ:  -0.44%   3.43%  26.70%  285.77%   31.46%


    Rec'd    #  Security     In At       Now      Change
   8/5/94  2200 AmOnline       0.91    124.88   13639.89%
   9/9/97  1320 Amazon.com     6.58    126.13    1817.01%
  5/17/95  1960 Iomega Cor     1.28      4.63     261.21%
  12/4/98   900 Excite@Hom    28.04     49.94      78.09%
 12/16/98   580 Amgen         42.88     72.31      68.66%
  4/30/97 -1170*Trump*         8.47      5.44      35.79%
  2/23/99   300 Caterpilla    46.96     59.88      27.49%
  2/26/99   300 eBay         100.53    125.00      24.35%
  2/20/98   260 DuPont        58.84     73.00      24.06%
  2/23/99   180 Chevron       79.17     97.13      22.68%
  2/23/99   290 Goodyear T    48.72     58.00      19.06%
   7/2/98   470 Starbucks     27.95     25.63      -8.33%
   1/8/98   425 3Dfx          25.67     15.06     -41.32%

    Rec'd    #  Security     In At     Value      Change
   8/5/94  2200 AmOnline    1999.47 274725.00  $272725.53
   9/9/97  1320 Amazon.com  8684.60 166485.00  $157800.40
  12/4/98   900 Excite@Hom 25236.13  44943.75   $19707.62
 12/16/98   580 Amgen      24867.50  41941.25   $17073.75
  2/26/99   300 eBay       30158.00  37500.00    $7342.00
  5/17/95  1960 Iomega Cor  2509.60   9065.00    $6555.40
  2/23/99   300 Caterpilla 14089.25  17962.50    $3873.25
  2/20/98   260 DuPont     15299.43  18980.00    $3680.57
  4/30/97 -1170*Trump*     -9908.50  -6361.88    $3546.63
  2/23/99   180 Chevron    14250.50  17482.50    $3232.00
  2/23/99   290 Goodyear T 14127.38  16820.00    $2692.63
   7/2/98   470 Starbucks  13138.63  12043.75   -$1094.88
   1/8/98   425 3Dfx       10908.63   6401.56   -$4507.06

                              CASH   $9924.87
                             TOTAL $667913.31
 
Note: The Rule Breaker Portfolio was launched on August 5, 1994, with $50,000. Additional cash is never added, all transactions are shared and explained publicly before being made, and returns are compared daily to the S&P 500 (including dividends in the yearly, historic and annualized returns). For a history of all transactions, please click here.

</THE RULE BREAKER PORTFOLIO>

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