The list of new-economy stocks on the brink of falling off the Nasdaq is growing. But their short runs aren't a surprise to analysts who expect a certain degree of volatility in an economy in the throes of a digital revolution.

"A lot of the dot-coms didn't have great business ideas," points out Kneko Burney, director of e-business research at Cahners In-Stat Group. "The companies just addressed the shift in economy: from industrial to digital. In the last couple of years, we have seen investors and companies capitalize on this shift. But now reality is sinking in."

This reality includes a more educated market. Wary investors will no longer pour money into a good idea that lacks a sound business model. Diligent analysis of a company's future profitability is replacing the exuberance for new opportunities that resulted in a saturated market. Too much money flowed into companies without viable business plans.

"There's clearly a Darwinian effect going on," says Derek Brown, an equity analyst at WR Hambrecht & Company, which once covered Bigstar Entertainment, an online direct marketer of filmed entertainment products that is on the brink of falling off the Nasdaq. "An incredible number of companies went public, and now, with the market tightening and with a good number of companies lacking profitable business models, we are reaching a breaking point."

WHO'S NEXT TO GO?

The most obvious sign of a dying company is a stock plunge. But market performance is not the only measuring stick. The Nasdaq also evaluates a company's trading history, net tangible assets, market capitalization, total assets, total revenue, pretax income, number of shares still available to the public, market value of those shares, operating history, number of shareholders and market makers, and corporate governance.

Using investment data provider Baseline Financial Services, Redherring.com found 224 technology and communication services companies that could be in danger due to low stock price and market capitalization. The 224 firms all trade at under $5 a share and have market caps less than $40 million. A few companies struggling to stay on the Nasdaq include Drkoop.com, Quepasa.com, and Theglobe.com. One that has already been delisted is Internet fax service eFax.com.

DOOMED FORMER DARLINGS

Closing Tuesday at 69 cents a share, or 93 percent off its 52-week high of $9.38, Bigstar Entertainment stated in its recent quarterly filing with the Securities and Exchange Commission that the company faces a potential delisting from the Nasdaq. The closing-bid price for Bigstar's common stock has remained below $1 since July 27, 2000, according to the report. The company has just a $7 million market capitalization and in the last 12 months has brought in only $17 million in revenue.

Even though Drkoop.com recently received $20 million in equity financing, the health Web site is also on the brink of busting, closing Tuesday at $1.08, or 97 percent off its all-time high of $45.75. As of June 30, Drkoop.com had only $2 million in cash, having gone public a little more than a year ago. On Monday, Drkoop reported a wider second-quarter loss, and said the SEC is conducting an informal investigation into whether the company violated securities laws. Drkoop also is the target of several class-action lawsuits.

EFax.com was recently delisted from the Nasdaq for failing to meet the requirement that it maintain $4 million in net tangible assets. The company, however, appealed for a delay of the delisting until the completion of a pending merger with J2.com, the Internet-based messaging and communications service provider that recently changed its name from JFax. But J2.com is also suffering on the market. It closed on Tuesday at $1.91, or 78 percent off its 52-week high of $8.63.

In its recent quarterly filing with the SEC, Quepasa.com stated that if the market value of its common stock continues to close below $1, the company could be delisted from the Nasdaq. Quepasa attributed its stock plunge to the significant price and volume fluctuations particular to Internet-sector companies. But Quepasa only has an $18 million market capitalization and brought in just $2.7 million in revenue during the last 12 months. The stock closed Tuesday at $1, or 94 percent off its 52-week high of $16.

Theglobe.com's best days are long behind it. Still best known for posting a more than 600 percent gain when it went public in 1998 -- a jump that at that point ranked as the largest first-day IPO performance ever -- the company now barely has any analyst coverage left. Closing Tuesday at $1.50, or 91 percent off its 52-week high of $17.13, the company has a $32 million market value and recorded $27 million in revenue for the last 12 months.

If the Nasdaq delists these companies because of financial difficulties, the stocks can still be traded, but without the help of the publicity that accompanies appearance on the National Market index. Such a spotlight increases the likelihood of news and analyst coverage, as well as additional financing and securities offerings.

NATURAL WEEDING PROCESS

But the number of companies that were actually delisted recently from the Nasdaq because they failed to meet the requirements hasn't been as high as some may think. According to Wayne Lee at Nasdaq Media Relations, of the 401 companies delisted from the Nasdaq through July 31 this year, only 92, or 23 percent, failed to meet the index's requirements. The rest voluntarily delisted, either by merging with another company or registering on another index. The same is true for last year. Of the 873 companies that delisted, approximately half did so for regulatory reasons.

Even though Ms. Burney believes that never before have so many businesses been so volatile, "the number of failures isn't any greater than with traditional businesses."

By delisting companies that are no longer viable, the Nasdaq only ratifies what the market has already done.

"This is healthy," says Peter Sealey, a professor at the Haas School of Business at the University of California at Berkeley. "We are seeing a logical restructuring of the market. We are seeing smaller players delisted, going out of business, and acquired. The industry will be more important in this post-fallout period."

The days for quick hits from new-economy stocks shooting up on hype alone may be over. But as companies with sounder business models begin to replace them, long-term investors can begin their more measured game.

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