Have Internet companies been naughty, or nice?

In my job, red and green are the strongest real-time indicators of the market environment: red stocks imply falling prices and green stocks suggest the inverse. But despite all the hand-wringing about the recent market downturn, as I stare at my stock screen, the majority of the Internet stock tickers I'm looking at are in a solid green state.

The question therefore is, why? Why have Internet stocks performed so well, and why are certain Internet companies breaking new highs, even while investor mood is overwhelmingly bearish?

Looking at Internet companies' quarterly results during September, no summary is more accurate than the old cliché, "the more things change, the more they remain the same." The quarterly results of publicly traded Internet pure-plays in September were extremely strong.

From Amazon.com selling more music online than anyone else despite only two quarters in the space, to Yahoo exceeding most analysts' dreams of margin expansion, Internet companies have significantly surpassed investor expectations.

Unlike in other industry sectors, however, the stunning financial results of Internet companies are not distorted. The Internet sector never settled into a price-correction lull long enough for analysts to adjust their quarterly expectations. To the contrary, certain Internet stocks and the majority of Internet sub-sectors now are either matching or exceeding previous highs.

These results would be less impressive if underlying market and economic conditions were positive for technology and other growth sectors as a whole, but they have not been. In fact, historically strong technology and services sectors, like Enterprise Resource Planning (ERP) and Y2K solutions, have had unusually difficult quarters. The enterprise and software sectors also seem to be having an increasingly difficult time, primarily due to market saturation and execution hiccups. In addition, I believe that the traditional client/server business model still is ill-suited to the adoption of technology as companies move from mission-critical technology needs to business-critical technology needs.

Internet stocks, on the other hand, continue to appreciate because of the growth of the Internet is unquenchable. Rates of usage as well as rates of adoption continue to exceed Wall Street expectations. Indeed, the only constant in cyberspace is the rate of the sector's growth.

But Internet companies are about to face the season for which investors have the highest expectations. Across the board, the December quarter is the one in which Internet companies expect their best results. Whether the business in question is business-to-consumer e-commerce, business-to-consumer media, or business-to-business software and services, the December quarter historically has been the strongest, with usage levels and purchasing levels reach annual highs.

Given those circumstances, investors expect the most from the December quarter. And last year's comparable figures are among the most difficult to beat. I believe this holiday season will prove to be one of the most telling quarters for the Internet as a whole, but more so for specific Internet companies. Those that cannot exceed analysts expectations will be significantly discounted by Wall Street.

Tis the season to brace yourself.

Danny Rimer is an equity analyst at Hambrecht & Quist covering CNET and Netscape. He writes regularly about the Internet in Perspectives.