Special Report: Is Nasdaq Killing the High-Tech Sector?

If dot-coms are looking to find a scapegoat for their ongoing struggles, the Nasdaq Composite Stock Index makes an easy target.

After all, the Nasdaq has proven exceptionally vulnerable to a slowing economy and concerns over future tech profits, whether they are e-commerce-based or not. When the Nasdaq slumps, the major tech players are usually slumping, too.

Are dot-coms at the mercy of a market that dramatically overreacts to economic news? Does the Nasdaq lead to inflated e-commerce pessimism or optimism? Most importantly, are e-tailers straying from their business models to appease the sensitivities of their investors?

According to analysts, even if high-tech companies have to bend to please the fickle fates of Nasdaq, ultimately they have no one to blame for their tribulations but themselves.

In other words, the Nasdaq’s fluctuations remain more of a consequence than a cause of the dot-com shakeout.

“Most of the e-commerce companies that have been failing lately would have failed anyway, but part of the failure has to do with over-optimistic ambitions,” Morningstar.com stock analyst David Kathman told the E-Commerce Times.

Trouble Within

“The market is not stupid,” Kathman said. “Most of these companies whose stock prices are down below a dollar deserve to be there. But maybe if some of them had scaled down their ambitions and kept out of the public eye, gone slower, they may have had a better long-term shot.”

Bear Stearns analyst Jeff Fieler said that the main impact of a slumping Nasdaq on e-commerce stocks isn’t overinflated pessimism, but reduced sales.

“Other than the extent of the effect on overall consumer spending, [the Nasdaq] doesn’t have a dramatic effect,” Fieler said. “What it does affect is the total sum of business for the e-commerce players.”

Irrationality Blues

E-tailers may have one worthy source of complaint however: reactionary investor sentiment. Fieler said that overreaction is a function of the capital market.

“Investors were initially very enthusiastic in the long-term payoff, but when that payoff didn’t come as quickly as they hoped, the stocks began to bottom out,” Fieler said. “But e-commerce is still growing at a rate of 60 percent right now, despite the recent failure of the dot-coms.”

Kathman is among those who believe that going public is a double-edged sword for e-commerce companies. On the one hand, it gives them a lot more money to play with, but on the other, they’re accountable to investors and have to respond to negative investor sentiment right away.

Power To The People

“It used to be that e-tailers just spent lots of money because that’s what investors wanted to see,” Kathman said. “The focus was on revenue estimates — we need to grow such and such percent — and that may have fueled some of these companies to spend more to get that growth going even faster and that turned out to be a bad decision.”

Added Kathman: “But now, growth isn’t as important as moving to profitability. Now [companies] have to cut costs — which is a good thing.”

So while public ownership may be forcing high-tech companies to adapt their business models, blaming the Nasdaq for the many dot-com earthquakes is akin to shooting the messenger — however volatile a messenger it is.

“Investor sentiment can be too negative in the case of some stocks, but for most of these e-commerce stocks the negativity has been justified,” Kathman said.

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