economics 101 meets dot com 20 december 2000 by johnmichael patrick monty monteith

For a couple of years now we have heard from investors and brokers from all circles that the new economy was different. That these new tech stocks were immune from the standards old stocks were held to. Old standards that said a companies value is based on profitability and independence. These standards, according to the experts, do not apply to the new world. The new investment world has no need for P.E. ratios since a companies domain name is worth far more than earnings percentages. Privately, while countless individuals were investing their life savings in hundred dollar a share Internet stocks, we whispered to each other that the end was coming any day now. We watched as friends and enemies became overnight millionaires thanks to stocks seemingly defying reality. At times, we might have even questioned whether the experts were right. That was then.

While the Bible tells us not to rejoice in the misfortune of another, it is difficult not to gloat a little, isn't it?

Yes, as most of us knew long before the death spiral for dot coms started, profitability is all that matters in the business world. While these Internet corporations can fit as many buzz words into their strategic plan as humanly possible, at the end of the day it is the greenbacks in the bank that will keep the company viable. As we are finding out, most of these companies either (a) had no intention of earning a profit, or (b) are now realizing that their business plan could never be profitable.

In a day not long ago the biggest sector of the dot com world was online retailing. Countless online retailers selling toys, dog food, deodorant, vitamins, CD's, and anything else you could want. Supposedly these companies were going to replace retail businesses. Then reality hit. Sending a fifty-pound bag of Alpo overnight to Alfie in Springfield Oregon from Atlanta Georgia costs more than the product. So how does one compete with Safeway that had it bulk shipped in by truck, and has it sitting on a shelf? The only way is to sell it at a loss, and eat the cost of shipping.

No surprise that online pet stores were some of the first ones to bite the big one. The online drug stores did not fare much better. Corporations are finding the hard way that shipping kills any profit they may have been able to make since anyone who truly wants a 'deal' will buy their products bulk from Costco for half the price. How about toy stores? Same problem, and eToys.com can be purchased at less than fifty cents a share as they head for chapter eleven. As it has turned out, the two products most likely to make it online are books and CD's, and even those are not keeping CD Now, Amazon, and BN.com from feeling enormous profitability pains.

But it is not just online retailing that is feeling the crunch. Companies that do Internet services are also hurting. Loudeye.com, a company that does streaming media, has gone from fifty-four dollars a share to a buck fifty. While not quite pocket change take over material, it is scary to think you have a choice between an extra-value meal at McDonalds or a few shares of your favorite IPO. Pick a company, check the stock ticker, and you will be amazed what you find. Profitability is suddenly the number one buzzword in the dot com world, and even phrases like "road to profitability" will not help if the financial statement is red.

While reality sets in on companies not making a profit, it is unfortunate for companies that have shown their value, because they too are feeling some of the same pains. Apple Computer, for example, has fallen from seventy five to fourteen dollars a share when Steve Jobs has shown the company can and will make money. This is especially silly when one considers that some of their most innovative products are just around the corner from release. So, while I think almost all tech stocks, including Apple, were over-valued a few months back, the ones that are profitable will likely find a middle-ground before too long.

If you are looking to do some long term investing, this is probably not the best time to do it. Most of these companies will go further down before they come back up for air. Perhaps most will never make it up for that last gasp. Still, the once unused P.E. ratio is now one of the most important and easily identifiable tools for determining whether a particular investment is worth the DNS server in its back room. It is up to all companies, even the darlings of the Net, to show those earnings. If not, well, that is one more domain name available to the rest of us.

Now wipe that smirk off your face.

Yes.. I can't, either.