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Pulse: Dot-Com Doubters Drub Internet Stocks

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The Internet sector proved once again that it was a tough neighborhood to hang around.

TheStreet.com Internet Sector

index dropped 6.6%, driven by concerns over cash, value and continuing doubt over the viability of Web-based businesses.

Internet holding companies

CMGI

(CMGI)

and

Internet Capital Group

(ICGE)

again were the targets of opportunity for dot-com-dubious investors.

One of CMGI's most visible properties, Web-hosting service

NaviSite

(NAVI) - Get Navient Corp Report

, was downgraded by

Merrill Lynch

this morning. The report by Thomas Watts reduced the stock's rating from buy to accumulate and said that 60% of NaviSite's customers are dot-coms vulnerable to the Web washout, and it also was exposed. And, the report continued, a sale of the site might be possible. NaviSite was down $1.25, or 15.2% to $7 -- hitting its 52-week low. CMGI went down with it, dropping $1.56 or 10.6% to $13.13.

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Continuing cash worries plague fellow Internet incubator ICG. Company officials repeated Wednesday that they were going to keep funding only 15 of ICG's 74 companies and didn't plan to raise additional strategic money until late in 2001.

"At current levels, we believe ICG has just enough liquid resources to fund its operations and support its 15 key assets through 2001,"

Credit Suisse First Boston

analyst David Dusenbury wrote in an update today. The debate seems to be over whether any of the company's business-to-business sites will make it to market. It's a dicey bet, with the

IPO market registering only a small uptick over last quarter.

"There's been a glut of innovation," said analyst Phillip Leigh with

Raymond James

. "There are a lot of novel ideas, but some of them aren't necessary. It's really time to say that many of these ideas are not going to be profitable."

Business-to-business software makers

Ariba

(ARBA)

and

i2 Technologies

(ITWO)

, whose alliance may be on the

verge of crumbling, were down significantly. Ariba was down $14.13, or 15.4%, to $77.86, and i2 was down $17.94, or 12.4%, to $122.63. Rival

Commerce One

(CMRC)

was down $2.37, or 4.3%, to $53.31.

Search portal

Yahoo!

(YHOO)

dropped $4.19, or 7.3%, to $52.94. Yahoo! was one of the companies mentioned Wednesday as being vulnerable to the Web advertising slowdown that Merrill Lynch analyst

Henry Blodget said will last into the middle of next year.

BroadVision

(BVSN) - Get BroadVision Inc. Report

was the index's only winner -- up 69 cents, or 2.09%, to $33.56 -- after an upgrade from

Robinson-Humphrey

, which noted its announced partnership with

BEA Systems

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. The two firms make software that allows different Web applications to work together.

2:51 p.m.: Investors Take Away Chip Stocks' Recent Gains

What the market giveth it often taketh away. After three straight days of moving higher, stocks of semiconductor companies started giving back some of their recent gains.

Overall, the

Philadelphia Stock Exchange Semiconductor Index

was trading down 2.9%. Sliding most steeply were communication stocks after

Merrill Lynch

analyst Joe Osha downgraded shares of five companies from buy to accumulate. Osha wrote that combined inventories at equipment manufacturers could be as much as 40% higher than usual.

Among those communication chip stocks hit hardest were

PMC-Sierra

(PMCS)

, down 3.2%,

Broadcom

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, off 10.7%, and

Applied Micro Circuits

(AMCC)

, trading down 12.5%.

These companies make semiconductors that are used in high-speed communications networks and devices, which are rapidly growing industries. The suspicion is that equipment manufacturers have been caching away chips in order to meet production demand. So what's the impact? Osha wrote that communications component inventory "appears to be at the highest levels it has been over the last four years."

Demand for semiconductors is expected to stay strong, but communications chipmakers may see orders drop in the near future as manufacturers use their stockpiled inventory. The rich valuation of many of the communications stocks makes them vulnerable to price pressure, said

Edward Jones

analyst Terry Daniels, as does uncertainty about how strong future orders will be. "Until we get closer into the fourth quarter, I expect that nervousness to continue," Daniels said. Edward Jones has no underwriting relationship with the companies.

Applied Materials

(AMAT) - Get Applied Materials, Inc. Report

was adding to the latest round of uncertainty to touch the chip sector. The semiconductor manufacturing equipment maker announced

earnings Wednesday that beat the Street's expectations, but the company also said it has some concerns about future orders.

Applied is recently unchanged, even though Merrill Lynch downgraded its earnings estimates for the 2001 fiscal year. AMAT, as the company is known, supplies more than 25% of the world's semiconductor wafer manufacturing equipment.

The company said it has concerns about slowing demand for the types of semiconductors used in PCs and in the telecommunications industry. It also noted that up to 25% of its sales for 2001 would be for equipment used to make new types of semiconductors rather than for increasing manufacturers' capacity to make more chips.

DRAM maker

Micron Technology

(MU) - Get Micron Technology, Inc. Report

also was active, trading down 2.9%, after analysts noted a buildup of the type of "instant" memory used in PCs. Analysts from both

Prudential Securities

and

Thomas Weisel Partners

lowered earnings estimates and price target for Micron. Eric Ross of Thomas Weisel lowered his price target from $80 to $70. He also wrote that DRAM inventories for Micron and for PC makers have moved from 4 to 5 weeks to 6 to 7 weeks.