To look at specialty e-tailers' stocks, you'd think the whole category is kaput.

In the current shakeout, Wall Street analysts have largely gravitated to three big names --

Amazon

(AMZN) - Get Report

,

eBay

(EBAY) - Get Report

and

priceline.com

(PCLN)

-- figuring that these companies have changed the way people shop and thus aren't going away. Meantime, the tide has turned against pure-play specialty retailers with what can politely be called a vengeance:

eToys

(ETYS)

is 91% off its high,

Drugstore.com

(DSCM)

is off 86% and

Barnes & Noble.com

(BNBN)

is down 66%.

Yet, there is life beyond the big three, say industry observers. Specialty e-tailers of higher-margin products and services that give consumers what they want can charge enough to build viable businesses. Sure, investors may have to scale back expectations: Every market may not be measured in the tens of billions, and even the successful specialty e-tailers will need cash as they lurch toward profitability. But plenty of opportunities await well-positioned, well-managed companies.

Cash Is King

Lauren Cooks Levitan, an analyst with

Robertson Stephens

, recommends companies targeting specific markets, with room to expand gross margins and enough cash for at least several quarters. As a result, she is recommending leading "vertical" players such as eToys and Barnes & Noble.com.

She also classifies companies including

1-800-Flowers.com

(FLWS) - Get Report

,

Ashford.com

(ASFD)

, Drugstore.com,

Garden.com

(GDEN) - Get Report

and

PlanetRx.com

(PLRX)

as "challenged yet salvageable." These guys have lots of customers and good name recognition, even if they don't have the margins that the first tier has. If all else fails, they may be attractive acquisition or merger targets. (Her firm has done banking for eToys, Ashford, Garden and PlanetRx.)

While most of them will need cash before they turn profitable (Ashford.com predicts it won't have to return to the market first), she thinks they'll be able to get it -- and thus, to build an independent business. "A lot of companies funded as stand-alones make sense as stand-alones if there is capital to build a brand," she says.

King for a Day

Scott Galloway, founder of gift site

Redenvelope.com

, is making a big bet that there's room for successful specialty players. Galloway's take: Companies have to address a certain demographic group, fill a brand void and somehow leverage the Web. If they do all that, he says, people are willing to pay up for it. Hence, good margins.

To be sure, in this second wave of specialty e-tailers, expectations are lower than the first time around. "A lot of companies were fooled into believing that they'd be billion-dollar businesses," says Ken Cassar, an analyst with

Jupiter Communications

(JPTR)

in New York. "

Smarterkids.com

(SKDS)

and

toysmart.com

were conceived as niche plays, and then they became convinced that they had the ability to be megaplays."

Accepting the fact that not every e-tailer will have the scope of Amazon is Matthew Mosman, senior vice president for corporate development at

Oracle

(ORCL) - Get Report

, where he's in charge of the

Oracle Venture Fund

. "Playing in any niche limits the ability on the upside," he says. Nevertheless, the fund has invested in

chipshot

(which sells custom golf equipment) and fine jewelry e-tailer

Miadora.com

, both of which Oracle believes should reach profitability and have business models that will change the fundamental economics of their respective markets. (They also use Oracle technology, one of the criteria for the company's investment.)

Size Matters

Of course, not every specialty e-tailer is a good one. A raft of commodity.coms went public and just as quickly crashed. "They've spoiled the water for everyone," sniffs Galloway. "They were businesses that didn't deserve to be in business."

Some of those are probably on Levitan's "challenged" list (note the omission of "yet salvageable"). These poor guys have less than a year of cash, and investors aren't convinced that their business will actually work, particularly given the current tough environment. They may be bought, but it may not be at a premium. The Wall of Shame includes

Buy.com

(BUYX)

,

Fogdog

(FOGD)

,

CDNow

(CDNW)

,

Pets.com

(IPET)

and Smarterkids.com. (Of those "challenged" e-tailers, Robertson Stephens has done underwriting for CDNow.)

And lest you call Levitan a skeptic, know that many observers remain skeptical about the entire group. "Our big concern for these niche players is their lack of scale," says Michael Gross, an analyst with

Lehman Brothers

. He estimates it takes somewhere in the neighborhood of $110 million a year to run a viable Internet business with a strong brand: $65 million for marketing, $30 million for product development and Web-site maintenance, and $15 million for overhead costs. That means a company would have to show annual sales of between $700 million and $900 million just to be viable, he says. Not many do -- only Amazon and priceline are expected to hit that benchmark during calendar 2000.

Jupiter's Cassar says specialty e-tail as a concept is far from passe. "That's where the real growth in e-commerce will come over the next few years," he says. "But people have to accept the fact that they aren't going to be huge." That may be hard for some companies -- and their investors -- to take. But a modest existence can still be pretty good. It's a whole lot better than being dead.