Dear Net Investors: Happy New Year

2000 could prove to be the 'show-me' year as Net companies no longer can rest on their IPO laurels.
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This is all you need to know about the stock market in 1999: So far, the Street has been open for business 246 days. And so far this year, 210 new Internet companies began trading.

For the stock market, 1999 was surely the Year of Raw Meat. But what comes next?

Beyond the trends of broadband and mobile Internet, another trend looms in the Year 2000 -- seasoning. Net companies will no longer be able to rest on the laurels of a successful initial public offering. For a vast majority of Net stocks, 2000 will mark their departure from the Net market, and their entrance into the gauntlet of the real stock market.

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Understand what happened here. A year ago investors had just a few dozen Internet stocks to choose from. So if big mutual funds wanted Net investment, they took what they could get:

America Online



(AMZN) - Get Report




surged. More adventurous souls gambled on the likes of


(RNWK) - Get Report



and won.

In 1998 the options expanded slightly, but this year it wasn't a stock-pickers' market as much as an IPO market. Big-money traders were rewarded with fat IPO gains, courtesy of friendly investment banks. Never mind the fact that few average investors could participate. And never mind the fact that so many companies were feeding at the public trough before the ink on their business plan was dry.

High Times
The number of Internet IPOs surged to unimaginable levels in 1999

Source: IPO Monitor

Investment banks were looking for that 7% commission. And by raising $16.7 billion this year, bankers in the Internet sector earned somewhere close to $1.17 billion in underwriting commissions before a single trade was done, according to

IPO Monitor

. The big funds, meanwhile, were looking for a sure thing -- and they got it. The average Internet IPO offered a return of 191% for those lucky enough to get in at IPO price,

IPO Monitor

reports. So what if you got stuck with, say,



(its 61% loss made it the worst performing Net IPO of the year)? A single share of

Commerce One


, the year's hottest IPO with a 1863% gain, more than made up for the loss.

"All you had to do this year was put together a dot-com business plan, find a banker, go out on a road show and not screw up and you'd get a huge valuation," says Richard Schottenfeld, manager of the New York-based

Schottenfeld & Associates

hedge fund. "But not every Internet company is good, not every business model works."

Schottenfeld considers himself to be a "technology value" investor -- in other words, an oxymoron in this Net stock market. But he thinks that this year, the Internet market may turn his way. That's because Net stocks will soon have to face a frightening specter the likes of which they've never seen -- the ghost of quarters past.

The 210 stocks that went public this year -- the lion's share of the entire Net stock market -- will have to face year-over-year comparisons for the first time. Revenue numbers will have to stack up with the promises made by peachy-faced CEOs. Growth will have to come with disciplined margins. And unlike the last two years of Internet stock investing, investors will have choices about where to put their money. If one Net stock stumbles, for the first time, there will be plenty of other Net stocks ready for the taking. The stalking-horse of competition will follow all these new names.

"As soon as we start to see Christmas numbers, you're going to see a fallout," says Schottenfeld. "If Christmas doesn't grow right, if sales of

Yahoo! Shopping

aren't right, if doesn't turn a profit in their book business, if


doesn't deliver the revenues they've promised ... I don't know what the right numbers are, but for the first time they have the size and scale to have metrics now."

The desirables, finally, will distinguish themselves from the undesirables. And the market's Net cliches will die hard and fast. The market is likely to have little tolerance for the "profitless" Internet companies of yore. The "hot Internet IPOs" will give way to "what-have-you-done-for-me-latelies."

"I think the sector is in trouble," says Schottenfeld. "The winners might explode to the sky and the losers fall off the earth. But the more prescient fact is that there are going to be losers."

The Year 2000 promises to be the show-me year for Net stocks. God help 'em.

Cory Johnson files weekly from's San Francisco Bureau. In keeping with TSC's editorial policy, he neither owns nor shorts individual stocks, although he owns shares of He also doesn't invest in hedge funds or other private investment partnerships. Johnson welcomes your feedback at

For more columns by Cory Johnson, visit his

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