Market turmoil shakes world of dot-com investors

The second quarter was agony for e-commerce companies that closed shop, dot-com workers who were laid off, and investors who watched the market slide.

But it may also have been an economic watershed.

Complete results

Second Quarter Top 25 winners Top 25 losers Entire list alphabetically

Experts say the second quarter that ended last week may go down in history as the turning point in the "new economy"--the period in which euphoria gave way to skepticism and the Internet bubble burst.

"My sense is that some reality has re-entered the market," said Ronald Masulis, professor of finance at Vanderbilt University in Nashville. "It's not enough to be a dot-com. People are now asking, 'Are these really companies that are going to make money eventually, and are they good investments?'"

Top tech stocks for the second quarter According to CNET Investor, these were the 10 best- and worst-performing tech stocks in the second quarter. (To qualify, the market cap had to be greater than $1 billion at the end of the quarter.)
Company	% Chg
Winners
PC Connection	+203
Insight Enterprises	+89
MMC Networks	+62
Burr-Brown	+59
ADC Telecom	+56
Art Technology Group	+54
Integrated Device	+51
Nvidia	+51
CDW Computer	+48
Three-Five Systems	+48
Losers
S1	-73
Citrix Systems	-71
Harmonic	-70
Novell	-68
Covad Communications	-67
Engage	-66
MicroStrategy	-66
724 Solutions	-65
Teligent	-65
OpenTV	-65

The tech-heavy Nasdaq composite index lost 13 percent of its value from March 31 to June 30, and some of the hardest-hit shares were of e-commerce companies that soared during the previous two quarters. Business-to-business companies, which were the darlings of Wall Street in March, were particularly stung.

The quarterly woes peaked April 14, when a massive sell-off in technology stocks swamped the major stock indexes and sent the Nasdaq and the Dow industrials to their largest point declines ever.

The Dow lost 617.78, or nearly 6 percent, to 10,305.77. The Nasdaq lost 355.51, or about 10 percent, to 3,321.27, its second-largest percentage decline ever. The Standard & Poor's 500 fell 83.20, or about 6 percent, to 1,357.31.

Bankers and analysts who reaped fortunes in the first quarter and got burned in the second were blunt about the pain their investment roller coaster inflicted.

"We were cruising for a bruising, and we got it," said Al Goldman, chief market strategist for A.G. Edwards. "The mood went from glee to gloom."

Said Pip Coburn, senior technology strategist at UBS Warburg, "The second quarter was pure misery for tech investors." Coburn blamed the pinch on the lofty valuations of some Internet companies that had yet to make a profit and on rising interest rates.

Concern reached such a pitch that strong earnings reports in early April did little to stem investors' fears. Several bellwether tech companies performed well, with executives predicting solid growth for the remainder of the year. But even positive earnings reports and optimistic predictions couldn't stop skidding stocks.

Yahoo reported on April 6 first-quarter net income that surpassed analysts' expectations, in addition to healthy jumps in traffic and advertising revenue and soaring demand for the portal's services overseas. Several prominent investment banks reiterated "buy" or "strong buy" ratings on Yahoo, a profitable company that many consider the bluest of the Internet blue chips.

But Yahoo stock ended that day down 7 percent, at $154. It has since slumped nearly 20 percent, closing yesterday at $123.88.

"In April, if you had good earnings numbers or bad numbers, it didn't matter," Coburn said. "Your stock was going to sell off anyway."

A gloomy gathering
Pessimism was particularly striking at the 28th annual Chase H&Q Technology Conference, which was held May 8 through 11 in San Francisco.

The prevailing mood of the seminal event is usually jubilant, with thousands of investors and senior executives celebrating the wealth they've reaped from the booming technology sector. Analysts typically scurry out of closed-door conferences with cell phones stuck to their ears, buying thousands of shares of stock based on enthusiastic comments from executives.

This year, however, investors peppered executives with pointed questions about when, if ever, they expected profits. Some analysts treated boosterish executives with outright skepticism and hostility during closed-door question sessions. Instead of the buzz of cell phones and shouts, hallways were often filled with taciturn analysts and deafening silence.

"The mood surrounding the event this year was awful," Coburn said. "It was like going to a morgue."

What did they have to celebrate? Former tech darlings such as Qualcomm and Commerce One finally seemed to have their comeuppance.

Qualcomm closed yesterday at $60, down 67 percent since January. Commerce One closed at $45.38, down 72 percent since March. Of more than 150 tech mutual funds tracked by Morningstar, only two managed to post gains for the quarter.

But some observers point out that the crash may have an upside.

Finding a benchmark
Investors are now better able to determine a company's stock market value because they can rely on traditional measures of success--namely, a company's profitability.

The seemingly inexplicable methods used to value Internet stocks--often based on a combination of revenue, hype and senior executives' past business ventures--took a backseat to traditional measurements such as the price-to-earnings ratio during the bull market run on tech stocks.

"No one could figure out a way to make money from these concoctions," Bill Meehan, chief market analyst at Cantor Fitzgerald, said of the valuations of Internet companies in the first quarter.

By contrast, the post-boom model emphasizes sustained profitability instead of merely revenues.

"We've already seen the beginning of the end for Internet stocks and probably the end of the extreme valuations of the so-called blue chip technology stocks," said Tom McManus, equity portfolio strategist at Banc of America Securities. "The risks are a little better known and better understood."

Even online retailer Amazon.com, long considered one of the few dot-coms immune to traditional valuation methods, is starting to take a hit for its lack of profit. Its stock, which traded at more than $112 in December, closed yesterday at $36.31--a 68 percent dive.

Some say the second quarter, though an important benchmark in the history of the digital economy, is a prelude to even larger and more defining events expected in the next year.

Russell Roberts, an economist at Washington University in St. Louis, said historians are looking to Amazon.com to determine when the Internet economy becomes a mature segment bound by the same rules that apply to sectors such as banking, oil and automotives.

"The crossroads will be when Amazon either makes a profit or goes out of business," Roberts said.

Others say the stock market demise of the dot-coms presents a great opportunity for old-economy companies, many of which languished in 1999 while their new-economy brethren flourished. Many academics say the so-called Internet economy of 2005 will be full of old-world names that many investors have been ignoring--behemoths such as Procter & Gamble, General Electric, Chevron, Coca-Cola and Boise Cascade.

"The rising tide will not lift all boats," Goldman said. "The Internet stocks are probably dead meat...It's the GE's, not the gee-whizzes, that will attract the money."

Earnings announcements in the coming weeks are certain to read strongly on investors' radar. With fewer concerns over Internet stock bubbles, interest rates and extreme valuations, second-quarter earnings could move markets.

"Now it's a fair game," Coburn said. "People aren't ridiculously biased positively or negatively...There's a calm, and earnings season might provide the storm. We'll see."