Earnings Reports a Tonic for Ailing ‘Net Stocks

Internet stocks entered the new year on a roll, but quickly hit a wall
as skittish investors and profit-takers drove down prices across a
number of sectors. While results so far this year have been mixed, the
market’s mood has been uneasy and slightly downbeat.

But in the last week, a steady stream of positive earnings reports has
lifted Internet stocks out of their post-holiday funk. According to
numbers from internet.com’s weekly e-mail newsletter, Internet
StockTracker, all 12 sectors (comprising more than 310 stocks) posted
average gains in trading for the week ended

Terayon Communications (TERN),
a maker of cable modems for Internet access, logged the biggest gain
this week, rising 70% to 107 1/16 through Wednesday. The company
reported a tripling of revenue in the fourth quarter to $38.7 million
and a pro forma net income of $1.2 million, along with a 206% increase
in annual revenues. TERN also picked up a couple of upgrades from Wall
Street analysts.

Supply chain management software vendor i2 Technologies’ (ITWO)
40 percent gain was fueled in large part by surging Q4 revenues and a net
profit of $15.4 million, or 17 cents per diluted share, compared to $3.5
million, or 4 cents per share in the year-ago quarter. ITWO also
announced a 2-for-1 stock split.

A number of other Internet stocks have been boosted by favorable
earnings reports in recent days, including Web content and communities
network Go2Net (GNET);
Web switch and server adapter vendor Alteon WebSystems (ATON);
Tut Systems (TUTS),
a maker of broadband access systems for multi-tenant buildings such as
apartments and hotels; and caching software and search engine market leader Inktomi (INKT).

One of the few companies that hasn’t benefited in the short-term from an
impressive quarterly report was America Online (AOL),
which once again met or exceeded analysts’ expectations. AOL posted Q2
net income of $271 million on sales of $1.6 billion, results greeted
with enthusiasm by most analysts.

It’s likely, though, that investors are still digesting the AOL-Time
Warner merger announced earlier this month, thus the hesitancy. But I
believe AOL’s continued success and growth is critical to investor
confidence in the entire Internet sector. After all, if the leading ‘Net
company falters, what will happen to the rest of them? For now, at
least, investors don’t have to worry.

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