It was inevitable. Last year’s decline in the NASDAQ composite index brought a sudden halt to a heady—some would say reckless—time for investors and acquisition-minded companies, particularly those focused on anything and everything connected with the Internet. Predictably, this slump has now sent the pendulum swinging in the other direction: many investors are staying away from the sector entirely, and established brick-and-mortar companies are scaling back their on-line initiatives. The survival of even leading Internet firms is being questioned.
The Internet roller coaster may rank as the market’s most dramatic upheaval over the past 20 years,1 but it certainly hasn’t been the only one. Remember biotech? Real estate? Leveraged buyouts? What about Japan Incorporated? Each fad was accompanied by the conviction among market bulls that—somehow, this time—classical notions of value creation, such as approaches that emphasized a company’s cash flow, were hopelessly out of touch with the new vision of investing. In fact, investment values always eventually revert to a fundamental level based on cash flows.
Although investors and companies can no longer throw money at every dot-com idea, they shouldn’t abandon the Internet. As they ponder the reality of a greatly reduced NASDAQ, they should cast a...