Wednesday

Adam Lashinsky on the State of the Internet

Dan Colarusso on Internet Growth Projections

Katherine Hobson on E-tailers' Push for Profitability

Catherine Valenti on Ailing Internet Funds

Jamie Heller on Using the Net to Track Net Stocks

Thursday

Tracy Byrnes on the Frenzy Next Time

George Mannes on Self-Hating Dot-Coms

K.C. Swanson on Old Economy Winners

David Gaffen on Measuring the Internet Economy

Friday

Ian McDonald on 'Butterfly' Companies

Justin Lahart on Real Net Valuations

Joe Bousquin on Building the Perfect Net Company

A Dan Gross Opinion Piece: Were the Old Guys Right?

TSC Roundtable on Predicting Six-Month Winners

Roland Jones on The Last Days of Daytrading

Eric Gillin on Working for a Dot-Com

Three years ago, the potential of the Internet so captured the imagination of U.S. business that it brought with it growth projections that in any other time would have been dismissed as pie-in-the-sky numbers. Today, investors who banked on such projections feel like they've gotten a pie in the face.

The numbers, especially in retrospect, were mind-boggling. In 1998,

Jupiter Research

told investors Internet retailing would account for $41 billion in annual sales by 2002; investment bank

Dain Rauscher Wessels

predicted Web-related software sales would climb to more than $1.2 billion in 2000; and last year,

Forrester Research

said the Internet advertising market would grow $22 billion by 2004.

If only projections were profits; Internet businesses would be humming. But we're not in 2002 yet and even the most optimistic Netgazers have curtailed their growth projections. Further, the heady growth in Internet usage has been accompanied by unprecedented competition and cutthroat pricing, and has necessitated huge advertising and marketing costs that have eroded profit margins. Thus a clear line has been drawn between projections of growth and the realities of running a business on the Net.

To Michael Davey, a technology analyst at

Investec Ernst

in New York, it's simple. "Any kind of prediction isn't very credible," he says. "Everyone became so enamored with

the Net that it was easy to manufacture fluff. Now it's become kind of a caricature of itself."

That caricature was fostered by prognostication of Internet dominance of everything from stock trading to grocery shopping by research firms such as Jupiter and Forrester Research. When applied to Internet stocks such as

Ariba

(ARBA)

or

Amazon

(AMZN) - Get Report

, it created outsize stock prices based on a boundless future.

Still, those rosy projections about Internet use can't be discounted. Online retailing has grown, electronic stock trading volume -- after surging -- only trails off when the market drops dramatically and the digital divide is closing rapidly, bringing more users to the Internet. However, with nearly 50% of U.S. households now Internet-enabled, the other half consists largely of lower-income families and older Americans who may not get plugged in anytime soon. The early projections are still being watched by investors; they just are not followed as if they were sent from a higher power -- and they certainly aren't juicing any stock prices to ridiculous levels.

What's different is that analysts and money managers are exercising discipline to keep those projections in sight, but are pricing the corresponding stocks based on actual performance -- a radical departure from standard operating procedure of the two years preceding April 2000. And with

TheStreet.com Internet Index

down 54% since January, it's been a painful re-education.

The trend has taken

priceline.com

(PCLN)

to its current $5 stock price from its projection-enhanced $104.25 post-IPO price. And hey, if Internet retailing is so hot, why is

Bluefly

(BFLY)

trading around $2.50 from an annual high of $16.81?

"The market was allowing us to look further out than next year. We were looking three and four years out," says Rob Zidar, the co-manager of

Merrill Lynch's

(MBNTX)

Internet Strategies Fund. "It is a high-risk, high-reward situation but the market was paying for it."

As the market contracted and investors threw out the rose-colored glasses, Net companies of all stripes and successes were dragged violently back to earth. Zidar points to Ariba as a prime example. "Ariba is a much better company that it was in the first quarter of this year, but the stock isn't anywhere near where it was," he says, pointing to the $183 level it saw earlier this year. On Tuesday, Ariba closed at $126.38.

So what do the prognosticators have to say for themselves? Internet advertising projections hit a small bump in the road because dot-com spending -- between 20% and 30% of the overall market -- has been curtailed by that sector's woes, according to Forrester analyst Jim Nail. Traditional advertisers haven't pulled back, though there is concern on their part about how to interpret the metrics of the Net.

So far, Nail says, the market is at $5.6 billion, on track for its projections. "The spending will continue to grow. There'll be a slow and steady increase but we're in for a couple of slow quarters," he said.

Jupiter didn't return calls seeking comment.

At this point, projections such as a recent Forrester call estimating that all e-commerce will reach $6.8 trillion by 2004 aren't having a huge impact on how investors view Ariba,

Commerce One

(CMRC)

or even Amazon. The analysts are calling it "hypergrowth"; investors may be instead choosing a barnyard epithet.

These days, money managers have a tough time caring about anything but the immediate future because thinking too far out, Zidar says, "can get you burned. Our willingness to believe is less."

Davey agrees: "At the end of the day, it's all coming down to cash flow and profits." He points to

DoubleClick

(DCLK)

and

CNet

(CNET) - Get Report

as examples of companies that benefit from the growth in Internet advertising but have worked to develop multiple streams of revenue.

There is one projection number he's watching. "It all boils down to how quickly people are going to get access," he says.

Whether the Internet can manage to hit the lofty growth projections on metrics such as e-commerce and advertising isn't clear. But even if it can, it's evident that the market won't care unless the growth translates to bottom-line improvement. Gone are the days when buoyant projections lift the sector's stocks.

But if investors learned the lesson on Internet projections, they may not have learned how to apply it elsewhere. Some heady numbers for the distant future are turning up elsewhere: Jupiter Communications says the move to mobile commerce, or m-commerce, will ramp up rapidly after 2003, reaching $22.2 billion in 2005.