With cash down, some DOT-coms seen facing shakeout

Even so, "companies that have sound underlying business models will continue to be able to go public and will also be able to continue to raise capital," he added. "As for those companies where the business models are unclear … they are going to continue to have trouble."

The latest evidence of an impending DOT-com shakeout came on Friday with the release of annual reports by Peapod and drkoop.com. In separate statements, auditors for each company questioned its ability to continue as a "going concern." As a result, shares of drkoop.com plummeted more than 40 per cent to close at a new 52-week low of 3-11/16. Peapod shares also fell 9/16 to close at 2-11/16.

The news followed a similar announcement by online musicseller CDNow Inc, which said on Thursday it could not say whether it would have enough cash to keep its virtual doors open through the end of the year. So the question many industry watchers are asking now is: Who’s next?

"It is hard to predict," Vroom said. "A lot of these companies, if they do have a good business model, will be able to find capital. "Certainly the sentiment shift has swung so far to the negative that we’re probably due for a bounceback," he said.

Some analysts have argued that online retailers that lack adiverse product selection will suffer, particularly if they are unable to leverage their brand identity and their customer base in order to sell more profitable, high-margin products. Others argue that hard assets, such as proprietary technology, are the key to luring private investors or a possible merger partner.

"It depends on the retailer," said Lise Buyer, an analyst with Credit Suisse First Boston. "Some of them do have some cash issues. Others are in very strong shape, and the stock price is not necessarily reflective of how much cash they have in the bank." Last week, Barron’s, a weekly business publication, conducted its own make-shift survey of more than 200 Internet companies analyzing each firm’s overall financial position.

The survey concluded that at least 51 of the 207 companies analyzed would burn through their cash reserves within the next 12 months, and many of them wouldn’t last the year without finding additional outside financing or a buyout prospect. Despite a collective brush-off from industry watchers, three of the companies that were featured on the top 50 list have issued statements this week confirming that there is a question over whether they can continue as a going concern.

"This should not come as a surprise to investors either because they bought these deals with the clear understanding that there were going to be considerable future capital requirements," Vroom said. "There’s billions of capital in private hands," he added."There will be consolidation, and I do think that some of the private financial sponsors will precipitate and drive consolidation among their portfolio companies to develop stronger brand presence."

Robert Burgoyne, technology strategist at the Monument Fund Group, said he tended to stay away from Internet retail stocks primarily because many of them lack what he calls a "defensible position" in their sector, meaning they are unable to thwart any competitors in their chosen market. "In the case of CDNow and Peapod, they potentially have a very large addressable market," he said. "But what they don’T have is a defensible position, which we think is the more critical of the two."

Burgoyne said in order to create that kind of defense, a company needs to own intellectual property, either through acquisition or development, and be able to license or lease those assets out to others in and outside of their sector. "If they had a gold-plated brand name that prevented competitors from entering their space, then that would be one thing," he said.

"You can have good business that only has a small addressable market as long as it has a defensible position," he said. "If your position isn’t defensible, then it’s inevitable that these types of things are going to happen." Among some of the market sectors that analysts predict might falter are books, music, and flowers as well as beauty products and pet care products, primarily because many consumers have a difficult time distinguishing the brand identity of most of the players in these sectors.

"Most people probably wouldn’t be able to tell you the difference between Petopia.com, Pets.com, Petstore.com or any of the others," said Joe Sawyer, an analyst at research firm Jupiter Communications. Sawyer predicted that most companies will shake out just before and during the 2000 holiday season, particularly within those low-margin product areas.

"There is a correct recognition that the Internet is still at a very early stage of development relative to its total potential penetration," Vroom said. "So there’s a lot of people behind the ones that go out of business to take their place."