It is this unpredictability that renders talk of an Internet stock's long term potential suspect. The fact is, no one knows how the Internet industry will shake out. But we predict that most of these companies will not survive. There are no barriers to entry to most Internet businesses. Besides, the Internet business model is designed to generate web site hits or revenues.
Profits are an afterthought, if thought about at all.
That investors are willing to pay top dollar for such companies is more than of passing interest. This is the same easy money that has enabled consumers to leverage themselves to record levels. The bank holds the stock in a special account and hedges the holdings with derivative securities. Because the stocks are the only collateral for the loan, the customer has no personal liability if the market heads south. Or to buy more stocks.