The Party's Over For The.com IPO.

If the last month was any indication, investors finally seem to be waking up to the reality of Internet stocks. After a series of lukewarm IPOs, including those of barnesandnoble.com and juno.com, and plunges in the market cap of many Internet companies, it's safe to say that com alone is no longer a guarantor of stratospheric stock performance.

Some attribute the weak openings and falling market caps to the overall performance of the market, which has been fluctuating wildly, and a weak technology sector. But this theory is not supported by the facts: companies like Novell and IBM are experiencing enormous success--in terms of earnings--and their stocks are jumping. In fact, IBM hit an all-time high just before it split in late May, the same week that several .com IPOs were floundering. As a barometer of the .com IPO market, one only need look to the IPO of EDGAR Online, which is the Web service that millions of people use to access filings from .com Companies about to go public. EDGAR opened at $9.50 per share and as of this writing was at 9-15/16ths, an abysmal failure by .com standards.

How should we account for these developments? In one sense, it's not exactly surprising that Internet companies have seen their stocks fall back to earth: market analysts have been predicting the so-called "bubble burst" for more than a year.

But I have another theory. Investors are beginning to understand that most .com companies do not offer any technological innovation. Innovative technology may not assure success, but it does offer at least some security for an investor sinking money into companies that continually lose money, as most .coms do. Strong technology attracts venture capital, which in turn attracts investment from the IBMs, Microsofts, and Intels of the world, which in turn allows for additional R&D and strategic partnerships. Having a clever .com name simply isn't enough to get the millions of hits that spur growth and revenue-though you'd probably get an argument from The Mining Co., which morphed into About.com overnight.

In a .com world, technological innovation means continually refining your mission. Hence, search engines become portals and portals become "supersites" with features like email, calendaring, chat, and virtual communities. Or, for another example, take Amazon-recent stock slips notwithstanding. From books to music to videos to, over the long term, pharmaceuticals, the company has sought to set the pace of ecommerce, not simply follow the lead of others.

Some observers have likened the .com phenomenon to the performance of drug company stocks in the 1980s, which shot up to unbelievable heights before eventually settling back down to earth. Unfortunately, there is one major difference: drug companies have profits; .coms don't.

Many economists worry that the rise of the .com has corrupted one of the most important statistics for investors: the PIE, or price-to-earnings ratio. This is the ratio between a company's stock price and the portion of its earnings claimed by each share. Writing in The New Republic, economist John B. Judis says that "the 50 year average P/E from 1940 to 1990 was 14. The average is now 35, and some Internet stocks boast P/E ratios above 100. eBay has a P/E of nearly 3000."

As long as the market continues its record-setting pace, numbers like these may not trouble investors. But they should. In a bear market, the first companies to tumble are those that have no track record of concrete earnings; this is the definition of the .com. I'm not suggesting that investors with some spare cash turn a blind eye to any business with .com on its letterhead, only that they dig below the surface to make sure the company is built on solid technology, not sand.