These past few months have tested the will of hardcore Internet investors and their analysts. Despite their assurances that companies can still lose a lot of money and be solid investment options, analysts are now coming to their senses.
No stock better exemplifies the conflicting philosophies of Internet analysts than Amazon.com Inc. (Nasdaq: AMZN). The days of $300 or $400 price targets appear to be over because the company has decided it needs to spend money to make money.
Investors love the triple-digit percentage leaps in sales and steadily improving traffic numbers. In fact, they were willing to ignore the ocean of red ink lingering at the bottom of the balance sheet, especially as these stocks were tripling and splitting in less in just a few months.
But those sharp revenue increases were curtailed when nouveau 'Net companies decided they were going to focus their energy on acquiring more debt and offering more services. They wanted to build up their "infrastructure" to become the IBMs of the Internet.
That's all well and good when interest rates are stable and there's plenty of news to drive the Net sector higher. As soon as one or both of these key ingredients disappeared, the stocks collapsed.
These developments raise an important question: Are Internet investors really excited by the Internet companies that have committed themselves to building a leading brand or are they simply content to play one stock to the next in search of those ridiculously high returns?
A little glimmer of insight comes this week from Keith Benjamin, an Internet analyst at BancBoston Robertson Stephens. Benjamin, as much an Internet bull as anyone else on the Street, brought a little reality and candor to the situation.
"We expect a second-half rally driven primarily by consumers moving up to a considerably higher level of spending online across multiple retail categories with real money flowing across the Web," Benjamin wrote in a research report. "Short term, we wonder if this week's bounce was a head fake. Maybe we just want a quiet few weeks before we go back to school."
That type of honest, sensible thinking is extremely rare in the Internet analyst community. Sure, some Net stocks did pick up a little ground this week. But is it premature to draw any grand conclusions.
It gets better though.
"In the search to keep stock picking simple, we are finding ourselves leaning towards companies with or near profitability," Benjamin said.
When was the last time you heard an Internet analyst suggest that investors stick to Net companies that are profitable? That's a landmark statement.
It seems ridiculous to point out something so obvious, but that's how far removed from reality some Internet investors had gone.
Sure, the Internet is an emerging media that's changing every facet of our lives at an increasingly rapid pace. But when it comes to making, investing and spending money, profits are king.
This is a good day for Internet investors. Finally, the dirty little secret is out and investors can start dealing with it.