For Many ‘Net Companies, Judgment Day Is Near

By next Wednesday, the market’s process of sorting winners from losers among
Internet companies may shift into overdrive.

That’s because more than 150 ‘Net companies are scheduled to report earnings
this week and next, and investors will be watching closely to determine
which companies and sectors are worth betting on.

The two biggest days for Internet earnings announcements are today
(Tuesday), with 41 quarterly reports due,
and Aug. 1, when another 40 are expected
.

While investors are always supposed to keep an eye on the bottom line, this
earnings cycle looms as especially critical because it is the first since
Internet stocks began melting down this spring. Melting with them was the
irrational exuberance that propelled dozens of ‘Net companies to absurdly
high valuations based in large part on vague promises of huge earnings down
the road. Left in its wake was a thirst for real profits.

With the vast majority of ‘Net stocks down for the year to date, and with
dozens of companies facing rapidly dwindling cash reserves, time is running
out for many public Internet firms to prove to the market that they are on
track not only to survive, but to thrive.

Already we’ve seen a flight of money from ‘Net stocks as investors wait to
see which stocks rise from the rubble, as the percentage of investors owning
Internet stocks dropped to 19% in July from 24% in April, according to a
monthly survey by PaineWebber and the Gallup Organization. (See Sideline Money
Will Determine Future of ‘Net Stocks.)

You can bet that, with few exceptions, companies unable to show profits, or
at least a trend toward profitability in the near-future, will be punished
by investors no longer willing to prop up sagging ‘Net stocks in hopes of a
big payday.

One of those exceptions is Aether Systems, which was up more than 3% to 174
1/2 early Tuesday afternoon after releasing a quarterly report late Monday
showing a net loss of $2.36 per share, up considerably from the 15 cents per
share loss in the year-ago quarter.

Was it the huge revenue increase ($10.8 million, compared to $0.45 million
in Q2 ’99) that spared Aether from investors’ wrath? No, though that may
have helped somewhat. The real reason Aether shares aren’t being hammered is
because the company, as a seller of wireless data products and services, is
in this year’s hottest sector, and thus exempt from some of the new rules of
rationality now governing Internet investing.

The vast majority of money-losing ‘Net companies will not be so lucky.