Net Losses

In the world of Internet investing, few things are clear. But here's one: after last week's rout, dot.com stocks are 40% to 60% off their peaks, and investors are finding there is no safety net in Netland. For those with faith and a long investment horizon, discounted prices today are compelling. That's why the bloodbath didn't turn into a bigger catastrophe. Early last Thursday, Net stocks were in free fall and touching their lowest levels of the year. Enough investors suddenly viewed them as bargains so that prices turned up.

But for many, Net stocks remain the epitome of pure speculation. On an earnings basis, after all, a company with no profit is as expensive at $20 a share as it is at $40. That's what makes Net stocks so confounding. Most lose money, and predicting when they'll turn a profit and how big that profit will be is sheer guesswork.

Since mid-April, the pessimists have been winning the valuation squabble. Amazon.com once boasting a market value twice that of Sears, is now about as big as the Sears tool department. Founder Jeff Bezos has seen $8 billion of his net worth evaporate in four months. Sure, he's still worth $5 billion, but the roller-coaster ride is taking a toll on less well-heeled entrepreneurs and investors.

"It's been quite an experience," says Jack Marshall, founder of Photoloft.com which moves pictures across the Net. His stock, traded on the NASDAQ bulletin board, is down 66%, to less than $3 a share. All 32 of his employees have stock options. The collapse "hasn't really hurt morale because business is so good, we all know we're here for the long term," he says. Still, at many Net firms, the early-year euphoria of optioned employees is gone. Net investors, many of them day-trading online, have had a comeuppance as well. Losses have driven thousands out of the market.

A couple of points bear mentioning. First, Internet stocks are still up for the year--again of 24%, as measured by TheStreet.com Internet index. Second, Net investors who have been at the game longer than six months may still have sizable profits. The carnage has been largely confined to pure Internet stocks--such retailers as Amazon.com and eBay; communities like iVillage.com and TheGlobe.com media companies Marketwatch.com and TheStreet. com; and portals such as Yahoo and America Online. Many stocks that benefit from the Internet but don't depend on it to sell their goods have held up well. IBM is up 35% since Internet stocks peaked in April.

Why did Net stocks tumble? In retrospect, it seems clear that as they were hitting their highs, speculation had taken over. The average Net stock had risen 475% in the previous six months. Internet initial public offerings were routinely doubling and tripling on the first trade. A pullback was in order.

Rising interest rates helped bring that about. In Wall Street's perverse logic, higher rates, reflecting a robust economy--employment figures last Friday were strong--and the threat of inflation, are seen as negative because they threaten to slow the economy longer term and put off Internet profits further into the future.

Also, there is too much merchandise for sale. A flood of new Internet shares is hitting the market via IPOs this summer. Supply and demand are so out of balance that some of the new issues, such as flower seller FTD.com were postponed.