The Shocking (and Obvious) Truth

Internet investors are a reactive sort, which is one of the reasons why Net stocks can so easily soar or swoon in response to the latest news flash or offhand utterance by market movers such as Fed head Alan Greenspan or Merrill Lynch analyst Henry Blodget.

The reality, however, is that most of what passes for “news” or insight is too often merely a re-statement of the obvious. Take the cover article in the latest issue of Barron’s, which explores in detail the dwindling cash reserves of Internet companies.

Based on a study by Pegasus Research International, the Barron’s piece predicted that more than 50 publicly traded Internet companies would burn up their cash reserves in the next 12 months. (I write this in haste because the article projected that my employer, (INTM), will run out of cash in eight years, and I can hear that clock ticking.)

Quite frankly, the study’s methodology was crude and the results subject to misinterpretation, yet that didn’t stop tech investors from reacting as if they went in for a routine medical exam, only to be told they have a terminal illness. On Monday the Nasdaq suffered its third-largest one-day loss of all-time.

But what was the market reacting to? Here’s part of the article’s lead paragraph, which accurately sums up the entire piece’s premise

“Many of these companies will try to raise fresh funds by issuing more stock or bonds. But a lot of them won’t succeed. As a result, they will be forced to sell out to stronger rivals or go out of business altogether. Already, many cash-strapped Internet firms are scrambling to find financing.”

Honestly, is there anything there that we didn’t already know? That hasn’t been discussed, in columns, on TV, in stocks chatrooms, over and over and over again? Clearly what Barron’s is describing is the consolidation of rapidly evolving markets, a process that involves red ink and investor losses.

Then there was the list of 51 companies closest to burnout, which included companies such Peapod (PPOD), (KOOP), CDNow (CDNW), (EGGS), Pilot Network Services (PILT), (MTHR) and (SALN). These companies already are on many lists of Internet companies destined for demise.

Sure, a number of large-cap companies also were listed as headed for cash burnout within a year, companies such as VerticalNet (VERT), Intraware (ITRA), Interliant (INIT) and Digital Island (ISLD). But guess what? Those four and many others will have little problem raising cash one way or another. In fact, VerticalNet recently

received a $100 million investment from Microsoft in exchange for 2 percent ownership.

I’m not criticizing the Barron’s article — I thought was well done and explored an important issue that is often ignored by Internet investors. But the market’s over-reaction indicates that too many investors either have short attention spans or simply weren’t paying attention in the first place.

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