Is the Internet Stock Party Over?

Internet stocks have been “cracking,” as they say on Wall Street, all this week. That means CMGI, Yahoo, and even America Online are falling in price. For most of them, this comes despite strong earnings reports.

On Wednesday, however, one of the Internet bellwethers came out with a weak earnings report. Amazon.Com lost $61.7 million for the quarter ending in March, up from just $10.4 million a year ago. While revenue tripled, and its customer count nearly did as well, the top-line number was well short of the $300 million analysts had been talking about, and management told analysts worse news is coming.

History Repeating Itself?

The Internet stock bubble is based on the assumption that profits follow growth and incredible growth can go on indefinitely. If you just challenge that assumption a stock can fall, hard and fast, and it may not get back up. That’s just what happened to mid-90s high-flyers like Netcom and Open Market.

Amazon has been using its high-flying stock to buy into other companies, such as Drugstore.com and Pets.com, and to launch an auction site that competes with eBay. These new e-tailers have the same problems Amazon faces — a lack of profit — but they’re all lower on the growth curve. In fact, Amazon is looking more and more like CMGI — an incubator with stakes in lots of outfits — rather than a true e-tailer.

While Amazon’s problems may be specific to Amazon, this could mean trouble for other e-tailing stocks. That could make it harder for the new e-commerce players to fund their growth through stock, and that would be big trouble. If they can’t acquire or hire for the promise of millions of dollars in paper, how will these companies grow?

The question before Internet commerce companies now is, “how do you plan on surviving, after the Internet stock party’s over?”

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