<THE RULE BREAKER PORTFOLIO>
AOL On Deck
Still the best? Plus, Amazon, eBay
by Jeff Fischer (TMFJeff)
ALEXANDRIA, VA (July 14, 1999) -- Amazon and eBay have quickly flip-flopped: Amazon flipped into favor and eBay flopped out of favor. A month ago, eBay held the higher valuation. Now, Amazon is priced at $21.9 billion and eBay has declined to $15.4 billion. Investor sentiment means billions of dollars in value and sentiment can change quickly.
Following the addition of toys and electronics yesterday, today Amazon (Nasdaq: AMZN) announced a 49% stake in Gear.com, a closeout sporting goods retailer based in Seattle. Amazon spokesperson Bill Curry provided the quote of the day:
"The overall reason that we're making the investments we're making [Drugstore.com, Pets.com, HomeGrocer.com, Gear.com] is we have a long-term vision to be the leading destination for e-commerce, where people can go find and discover anything they want to buy on the 'Net. Anything is a big category.''
Anything is a big category. "Anything" means that Amazon has much more expanding and investing ahead of it. Therefore, it is encouraging that the company has added six new tabs, or businesses, to its site since 1995, and yet it hasn't demeaned its original book business in the process. Amazon must not harm its original roots as it grows. So far, so good.
New business lines and investments have restarted the Amazon fire, raising the stock from $89 -- hit on June 18 -- to $135. One year ago the stock traded at $36. Meanwhile, since early June eBay (Nasdaq: EBAY) has fallen from $165 to $125 as investors contemplate the site's outages and downplay embarrassment regarding the company's failed new site design. The new design was released just a few days before being withdrawn, and -- like a shy, awkward teenager who was recently laughed at -- it has yet to make another appearance. This sort of snafu is expected at a small, third-tier Web business, but not at a $20 billion Web leader. Yet, as Coca-Cola, Intel, and Microsoft prove time and again, snafus happen to the best of 'em.
eBay's earnings estimates have been ratcheted downward to account for millions in lost revenue during outages. Once the site operates reliably again and once the new site design is firmly in place, the stock could begin to see some relief. But until the new site emerges again, eBay is merely playing catch-up with itself -- it's attempting to claw forward to where it thought it was several weeks ago. Close on the heels of a reliable, redesigned service should follow, hopefully, more business expansion. An initiative into classified advertisements wouldn't be too surprising.
Today, high-end auctioneer Greg Manning Auctions (Nasdaq: GMAI) announced a venture with eBay's Butterfield & Butterfield unit. The two companies will auction fine art and collectibles on eBay's site -- in a new premier eBay auction area -- by autumn.
eBay's outages remind one of America Online's (NYSE: AOL) connection woes of three years ago. If eBay's problem is fixed, it could be forgotten. If it continues for too long, it could become destructive. Amazon, AOL, and eBay will announce quarterly results July 21, 22, and 26, respectively.
America Online is expected to meet the $0.11 per share estimate for fiscal year quarter four, announced on July 22, even though subscriber growth is expected to come in light compared to quarter three. On April 28, AOL shared that it added 1.8 million subscribers during the quarter ended in March. This was the largest absolute subscriber increase in AOL's history. In contrast, AOL predicts 750,000 to 850,000 new subscribers this quarter -- much lower, but still rising approximately 40% from last year and in-line with past quarter-over-quarter growth, so the numbers are not unusual in the end.
Next week, we should see that North American subscriber growth is surprisingly strong, while international growth could lag. This would be partially due to the emergence of free Internet Service Provider (ISP) services in England and France. Already, Free Serve in England has about twice the number of subscribers as does AOL U.K.
However, the international clouds over AOL aren't nearly as dark as one might believe. Due to AOL's joint venture status regarding its U.K. service, England's subscriber growth (or lack thereof) doesn't impact AOL's profit and loss statement. Therefore, the company consciously reduced marketing in the U.K. this quarter, accepting lower growth while analyzing the changing ISP landscape in order to decide its next move. AOL followed with price cuts. More cuts may follow, or, as many believe, AOL may launch its own free service in the U.K., one that would not be branded as an AOL service.
AOL users are of a demographic that are likely to continue to pay for AOL's content and reliability; a free ISP service would target other types of users. By the way, "free" hardly means no income for the ISP. Income is generated via higher phone charges in Europe, which are shared with the ISP.
All in all, it should be another strong quarter to end AOL's record fiscal year, with nearly $300 million in non-subscriber revenue, and with subscriber revenue growing sharply despite free access in Europe. Next up: broadband access promises to keep subscriber revenue hoppin' in the future, too, even if free traditional, or narrowband, access spills into the North American market (which isn't too likely en masse, given the different phone charge structure in North America).
The latest Motley Fool Internet Report (released yesterday) focuses on broadband access for over 25 pages. From it, I believe that AOL will lead in broadband access, sporting the highest number of broadband subscribers. This is contrary to the growing fear that AOL is missing the broadband wagon. AOL might actually be able to push digital subscriber line (DSL) access aggressively enough that DSL could eventually surpass cable access in number of subscribers. Especially if -- following the approval of the DSL standard two weeks ago -- the Baby Bells and other supporters build-out DSL services as rapidly as they intend.
AOL is still the best way, in the opinion of many, to invest in the new online world.
Day Month Year History Annualized R-BREAKER +1.75% 5.26% 35.42% 1259.20% 69.61% S&P: +0.33% 1.85% 14.32% 219.27% 26.50% NASDAQ: +1.43% 4.91% 28.51% 291.28% 31.81% Rec'd # Security In At Now Change 8/5/94 2200 AmOnline 0.91 123.94 13536.74% 9/9/97 1320 Amazon.com 6.58 135.00 1951.91% 5/17/95 1960 Iomega Cor 1.28 4.75 270.98% 12/16/98 580 Amgen 42.88 77.13 79.88% 12/4/98 900 Excite@Hom 28.04 48.94 74.53% 4/30/97 -1170*Trump* 8.47 5.38 36.53% 2/23/99 300 Caterpilla 46.96 59.81 27.36% 2/20/98 260 DuPont 58.84 73.00 24.06% 2/26/99 300 eBay 100.53 123.00 22.36% 2/23/99 180 Chevron 79.17 96.31 21.65% 2/23/99 290 Goodyear T 48.72 57.88 18.80% 7/2/98 470 Starbucks 27.95 26.50 -5.20% 1/8/98 425 3Dfx 25.67 15.56 -39.37% Rec'd # Security In At Value Change 8/5/94 2200 AmOnline 1999.47 272662.50 $270663.03 9/9/97 1320 Amazon.com 8684.60 178200.00 $169515.40 12/16/98 580 Amgen 24867.50 44732.50 $19865.00 12/4/98 900 Excite@Hom 25236.13 44043.75 $18807.62 5/17/95 1960 Iomega Cor 2509.60 9310.00 $6800.40 2/26/99 300 eBay 30158.00 36900.00 $6742.00 2/23/99 300 Caterpilla 14089.25 17943.75 $3854.50 2/20/98 260 DuPont 15299.43 18980.00 $3680.57 4/30/97 -1170*Trump* -9908.50 -6288.75 $3619.75 2/23/99 180 Chevron 14250.50 17336.25 $3085.75 2/23/99 290 Goodyear T 14127.38 16783.75 $2656.38 7/2/98 470 Starbucks 13138.63 12455.00 -$683.63 1/8/98 425 3Dfx 10908.63 6614.06 -$4294.56 CASH $9924.87 TOTAL $679597.68Note: 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.
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