Net Companies Move Beyond Survival Mode

"For the players that are left, it's obviously a much healthier situation," says Darren Chervitz, director of research at Jacob Asset Management's JAMFXJacob Internet fund.

The new reality of Internet stocks is perhaps encapsulated by how Wall Street treats them: Pretty much the same way it treats other stocks. Compared to a few years ago, brokerage firms hardly have any analysts labeled as "Internet" analysts. Those analysts covering Net stocks are often doing it in conjunction with other industries, such as retail, software, advertising or media. Mary Meeker, once synonymous with the phrase Internet analyst, is covering not-synonymous-with-the-Internet stocks such as Microsoft MSFT and Intuit INTU.

Confluence

But the revival of Internet stocks results from a number of trends at work.

First is simply the passage of time. It's been nearly eight years since the initial public offering of Netscape Communications in 1995 kicked off the Internet stock boom. It's been three years since Internet stocks peaked. TheStreet.com Internet Stock index hit 1350 in March 2000; now it's less than a tenth of that.

Once the capital that once flooded the market was cut off like water in a knotted fire hose, Net companies that couldn't live on what they already had in the bank simply shriveled away. For the survivors, that meant fewer old competitors and high barriers to new ones. For investors, it also meant fewer Internet-related stocks in which they could invest, increasing the scarcity value of the survivors.

Internet-related companies that have managed to survive are also doing better because they're simply plugging away at their businesses -- businesses that are generating cash now rather than at some elusive moment in the future. They're able to benefit from slow-and-steady trends in Internet adoption, rather than requiring the steep boost in usage from early adopters.

Internet advertising, after deflating with the Internet capital market bust, is growing again -- thanks in large part to pay-per-click advertising from leaders like Overture Services OVER, due to be acquired by Yahoo!. Broadband Internet connections via cable modems or DSL are relentlessly growing: The percentage of U.S. Internet users with broadband connections to their home grew from 25% in May 2002 to 36% in 2003. That's significant, if only for the reason that in all those households, the Internet is potentially on all day -- not used simply for short, discrete periods during which users may be rushed by the thought that they're tying up a phone line.

One last plus for Internet stocks: Though cash generation, once unimportant, is pretty much mandatory, in other ways the hurdles they have to clear are lower than they were when teams of analysts divided multiple Net stock sub-sectors among themselves. People no longer expect Internet stocks to change the world. They simply ask of them to do better in each quarter than they did in the corresponding quarter one year earlier.