Nasdaq: The Fundamental Things Apply

SAN FRANCISCO (04/17/2000) - By now, you are no doubt familiar with the ugly details of the recent technology stock sell-off. For just the ninth time in its 30-year history, the Nasdaq has tumbled into a bear market.

As I write these words on Wednesday night, the tech-rich index has swooned more than 25 percent in three weeks. Suddenly, we're closer to Nasdaq 3000 than 5000. There's no shortage of excuses for the decline: weak earnings at Motorola and Microsoft, concern over the Microsoft verdict, the Fed's insistence on raising rates, people taking profits to pay taxes. Whatever the reason, don't say you weren't warned.

Tech stocks generally, and Internet stocks in particular, were ridiculously overvalued. In 1999, the Nasdaq index gained 86 percent. Historically, stocks return an average of 10 percent a year. The explanation for the decline is less important than the outcome: Investors have regained some badly needed perspective, and rediscovered the concept of risk. Were this simply a stock market event, it would be a lot less interesting.

But it's a broader phenomenon: The Internet Economy suddenly looks a lot like the rest of the economy. No matter how tall the stacks of cash on Wall Street and Sand Hill Road, money is not free for the asking. Fail to demonstrate at least a modest chance to produce a profit, and the money spigot will be turned off. Cook Express, Value America, Peapod, Drkoop, CDnow, Iridium - the landscape is littered with companies that failed to create sustainable business models and crumbled as a result. There are more disasters to come.

Venture capital firms with big bets on Net retailing are scrambling to find a way to unlock their considerable investments - since you won't be seeing many consumer-Internet plays going public in the coming weeks, the VCs need another solution. Forrester Research, long among the Internet's biggest cheerleaders, now warns that almost all Net-only retailers are headed for oblivion.

Meanwhile, Safeguard Scientifics, a firm that spawned Internet Capital Group, the kingpin of business-to-business e-commerce, has decided to stop investing in b-to-b. Safeguard has refocused on infrastructure: software, communications and "e-services." What's sobering about Safeguard's decision is that it hints at the weakness of the business models underlying many of the highest profile Net stocks. With very few exceptions, the Street has long since given up believing in Web companies supported largely by ad revenues.

Now commerce-related sites are losing investor support as well. And while infrastructure companies seem more stable - it's hard not to bet on Cisco - in the long run it is a lot harder to make money selling picks and axes if there's no profit in mining gold. The irony is that this all comes at a time when corporate giants are finally making progress online. As noted elsewhere in this issue, some of the world's largest companies are teaming up with their fiercest rivals to create online exchanges. In every field, the biggest companies are pushing online.

As Bernhard Warner reports this week, the Big Four sports leagues are betting heavily on Net commerce even as online sporting-goods retailers struggle to stay afloat. Not good news for the survivors. What's it all mean? It means that new economy companies have to follow the same rules that apply to the old economy. New rules? There aren't any new rules. Revenues still matter. Business models matter. Valuations matter. And in the end, profits really matter. As time goes by - despite what some people desperately want to believe - the fundamental things apply. Even in the Internet Economy.

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