(FORTUNE Magazine) – Two years ago, a securities analyst at T. Rowe Price named Lise Buyer decided she wanted to follow Internet companies. T. Rowe Price is a legendarily conservative mutual-fund complex, the kind of place where such traditional measures of value as price/earnings ratios are paramount. Its fund managers make a fetish of avoiding fads, and they stay away from companies with outsized market capitalizations--companies like those that have emerged, one after another, in the new Internet universe. Microsoft, with its P/E of 63, is about as far out on the limb as a T. Rowe Price fund manager is likely to go.

Buyer had a deep respect for what she calls T. Rowe's "valuation bias"; indeed, it was her bias as well. Yet there was something irresistible about the Internet. "I just thought it had incredible potential," she says. Besides, she thought it might be fun to participate in something so new, something so rich with possibilities. So in fall 1997, she left T. Rowe Price and joined Deutsche Morgan Grenfell as its Internet stock analyst. (In July 1998 most of DMG's technology group, including Buyer, moved to CS First Boston.) Instantly, she was thrown into a world the likes of which she had never experienced. In this world, the tried-and-true valuation measures Buyer had always relied on were useless. After all, you can't have a P/E ratio if you have no "E"--and most Internet companies were years from reporting earnings. Yet the stocks were flying, and market caps were reaching gargantuan levels. Companies with seven-figure revenues had ten-figure market caps. Companies with negative operating margins had multibillion-dollar stock valuations. Companies would go public in the morning and have billion-dollar valuations by nightfall. And these weren't the exceptions. They were the rule.

At first Buyer was bewildered. She still wanted to be able "to make the math work," the way she always had at T. Rowe Price. But she couldn't. By any normal measure, the valuations of these Internet companies were preposterous. So she turned to a surprising source: "I went back to Graham and Dodd," she says. She began rereading her copy of Security Analysis, the classic text written in 1934 by the great value investor, Benjamin Graham, and his partner, David Dodd. After much searching, this is what Buyer found:

"Unseasoned companies in new fields of activity...provide no sound basis for the determination of intrinsic value.... Analysts serve their discipline best by identifying such companies as highly speculative and not attempting to value them.... The buyer of such securities is not making an investment, but a bet on a new technology, a new market, a new service.... Winning bets on such situations can produce very rich rewards, but they are in an odds-setting rather than a valuation process."

Today Lise Buyer covers 13 Internet companies. She has a "buy" rating on 11 of them. Yet she concedes, "I still can't make the math correlate with the stock prices." No matter. She points to the Graham and Dodd quote, which is posted on the wall behind her desk. "Reading that," she says wryly, "helped give me the courage to abandon my valuation bias."

This is a story about one of the companies Lise Buyer has a "buy" on: Yahoo. More precisely, it's a story about Yahoo's stock price, which, as FORTUNE goes to press in mid-May, stands at $158 per share.

To be sure, Yahoo the company has been one of the great success stories in the short commercial history of the Internet. Founded five years ago by Jerry Yang and David Filo, two Stanford grad students who created a Web "directory" more or less for fun, Yahoo today is widely considered one of a handful of companies destined to dominate its portion of the Internet "space." Its management team, led by CEO Tim Koogle, has built Yahoo into a powerful "portal" and one of the best-known brands in cyberspace. Its strategic moves--such as the recent acquisitions of GeoCities and Broadcast.com--have been applauded as savvy. The company's ability to "aggregate eyeballs," as they say in e-business, is unquestioned: In March more than 31 million people visited the Yahoo site, putting it just a hair behind the No. 1 site, AOL.

Most impressive of all, Yahoo is the rare Net company that is profitable. It turned its first small profit in the fourth quarter of 1996--a year ahead of most people's expectations. In the first quarter of 1999, Yahoo earned $16 million on $80 million in revenues. If earnings keep growing at the current pace, the company will make more than $100 million this year.

If the performance of Yahoo the company has been spectacular, the performance of Yahoo the stock has been unearthly, even surreal. In 1997, a year when Yahoo the company grew by 242%, Yahoo the stock rose 517%. Last year the company tripled its revenues and saw profits go from a penny a share to 13 cents a share; the stock ran up 584%. (So far this year the stock is up another 33%, despite the big falloff in Internet stocks that started in mid-April.)

Under the old, pre-Internet rules, a company with Yahoo's revenues and projected growth rate might be able to justify a market cap of, oh, $3 billion. Instead, Yahoo's market cap stands at $34 billion. Its P/E ratio in mid-May was around 1,062. This is uncharted territory not just for Lise Buyer but for everyone: for the day traders who have helped run up the stock so far and so fast; for the short-sellers who've gotten killed again and again on Yahoo; for the retail investors deciding whether to take the plunge; even for the pros at Fidelity Investments, who by the end of last year held close to 1.8 million Yahoo shares. Half of those were owned by Fidelity Magellan, the nation's largest mutual fund, which brings us to the most astonishing fact of all: Despite its unfathomable market cap, Yahoo is now viewed as a stock "safe" enough to be held by mutual funds that manage retirement money for tens of millions of Americans. Analysts routinely categorize it, along with AOL, Amazon.com, and eBay, as an Internet "blue chip." Fund managers buy Yahoo for "defensive" purposes.

There are plenty of people who still think that Netmania will turn out to be a bubble--and they may well be right. But for now, the more illuminating question is the more prosaic one. How did we get here? How did it come to pass that a company with $16 million in quarterly earnings could have a $34 billion market cap--and that no one dares suggest that its stock is overpriced? That story, the story of Yahoo the stock, is the story of the relationship between investors and Internet stocks. It's about how we all learned to abandon our valuation bias.

"These valuations are such a distraction," Michael Moritz is saying, affecting his most world-weary tone. The 44-year-old venture capitalist is slouched in his small office, his face propped against one arm; he appears to be struggling to stay awake in the face of such dreary questioning. "Clearly," he continues, "this has mesmerized all sorts of people." He sighs. "But I don't think it's that healthy for Silicon Valley--or for those trying to build a company."

Moritz is a general partner in one of the most storied of Silicon Valley venture firms: Sequoia Capital, whose progeny include Apple Computer and Cisco Systems as well as Yahoo. Back in the spring of 1995, before Yang and Filo even knew what kind of business they wanted to build, Moritz gave them $1 million in return for a one-quarter interest in their still unformed company. Soon thereafter he recruited "T.K.," as the 47-year-old Koogle is known in the Valley. Moritz remains a Yahoo director and adviser.

The Yahoo party line is that the company doesn't waste time thinking about the price of its stock. Management views its job as executing its business plan, explains a company spokeswoman, and if it does that, the stock will take care of itself. Though the run-up in the stock has made him a near billionaire, Koogle deflects questions about Yahoo's valuation. "These guys have never allowed themselves to be distracted by the hoopla over the stock," exclaims Moritz, suddenly animated. "They've always understood that they are building a business and not promoting a stock. In all the conversations I've had over the years with Jerry and the guys, I don't think we've spent five minutes talking about the stock. Not five minutes."

Those last two sentences are, well, unbelievable. Yes, the folks at Yahoo focus on running the business, but their soaring stock is hardly a mere byproduct of a well-executed business strategy. In the new world of the Net, the stock is a critical element of the business. A high valuation gives companies like Yahoo the inflated currency needed to make deals with other highly valued Internet companies, and helps them lure the most talented people. Most of all, a Net company's valuation has much to do with how it is perceived in the industry. Which is to say, the larger the market cap, the greater the esteem.

That Koogle understands this dynamic has been clear since Yahoo went public back in April 1996. Just months earlier, the Japanese company Softbank had sunk $100 million into Yahoo, becoming its largest shareholder. So the company didn't need money--the classic "old economy" reason for going public. Koogle didn't even want to do an IPO that April. "I really wanted a few more quarters. I wanted to be sure we could deliver our numbers consistently and ahead of [Wall Street's] expectations," he says.

In the end, though, the Yahoo CEO felt he had no choice. Two competitors, Lycos and Excite, had announced plans for IPOs, and Koogle felt Yahoo couldn't be left behind. If Yahoo waited to go public, it might be perceived as a laggard, and forfeit what Wall Street calls the "first-mover premium." "We couldn't afford to be boxed in," he says. "So we took the risk."

Of course, the company also did everything in its power to limit that risk. During the road show, it put out a series of projections that were, in retrospect, low-ball numbers. Indeed, one trait that has marked Yahoo ever since has been its ability to beat the Street's expectations, in part by insistently dampening expectations. To this day, analysts who cover the company have quarterly earnings estimates that are within a penny of each other--which they are guided to by Yahoo.

Managing the Street's expectations is hardly new; Cisco and Microsoft, among many others, are famous for their conservative "guidance." What is different for Internet companies is that IPOs are far more about publicity than about raising capital. In recent months some Internet companies have gone public with the explicit goal of having the stock run up 300% and 400% on the first day. They leave tens of millions of dollars on the table because they view the potential PR bonanza as so important. For Yahoo the issue was simple--it hoped the IPO would confirm its leadership in the portal business. (Of course, back then it was called the "search engine" business.) Lycos and Excite went public just weeks before Yahoo, and neither shot the lights out. Yahoo, on the other hand, priced its offering at $13 a share (these are pre-split prices), saw the stock jump to $43, and closed the day at $33--up 154%, giving it a first-day market cap of over $800 million. Yahoo's stock had outperformed the others; by the tortured logic of the Internet, that made Yahoo the leader in portals.

There is one other crucial fact about Yahoo's IPO--and indeed all Internet IPOs--that helps explain some of the giddy rise in Net stock prices. The "float" was tiny. When Yahoo went public, it had around 26 million shares outstanding. But only 10% were made available to the public. The rest remained in the hands of the founders and other insiders, such as Sequoia and Softbank. With a float that small, Yahoo was virtually guaranteed a successful IPO, since demand for its shares would far outstrip supply. This remains true today. After three stock splits, a handful of acquisitions (which usually require the issuance of more stock), and the normal amount of insider selling, Yahoo has around 200 million shares outstanding and a float of a little over 80 million shares. Since the stock's popularity has grown just as fast, a supply-demand imbalance still exists. As Michael Parekh, the Internet analyst at Goldman Sachs, puts it, "Float matters." Truth to tell, in the early days of a Net stock's life, little matters more.

Lise Buyer was hardly the only person to see that a job as an Internet stock analyst was highly desirable. As a researcher at Paul Kagan Associates in the early 1990s, Steve Harmon had also caught the bug. "When I first saw Mosaic"--the revolutionary browser that became Netscape Navigator--"I said, 'This is it,' " he recalls. He had neither the connections nor the wish to land a job like Buyer's at a mainstream Wall Street firm. Instead, in 1996 he hooked up with Mecklermedia, a magazine publisher that was quickly branching onto the Web. On Meckler's Internet.com Website, the company's new "senior Internet and media investment analyst" began writing twice a day about Internet stocks.

Yahoo was one of the first he wrote up. On the eve of its public offering he gave a glowing appraisal of Yahoo's prospects, flatly predicting that its IPO performance would outdo Lycos' and Excite's. He conceded that there were those who thought its valuation would be "frothy," but he downplayed those concerns. He went on to say something that is now widely accepted by Wall Street: that Yahoo was not, in fact, a technology-driven "search engine" but rather a "directory service," an accumulator of Web content that would make money mainly from advertising--and that that would turn out to be the superior business model. "Some could say that Yahoo is what America Online wants to be when it grows up," Harmon wrote in a notable burst of enthusiasm.

Three years later, Harmon, now 34, can still recite that line from memory. Sitting in a coffee bar in Palo Alto, he is happy to recall other triumphs as well. He set up the first index of Internet stocks, he says. He was prescient about not just Yahoo but also DoubleClick, Inktomi, @Home, and a raft of other Net stocks. He is read by Bill Gates, John Doerr, Marc Andreessen--and some 100,000 investors who get his reports via e-mail.

Harmon believes he is in the vanguard of a new kind of investing--in which Internet users learn about Internet stocks from Internet analysts like himself and then use the Internet to trade those stocks. "I'm in sync with the Net," he says. "I believe in the new axiom: If you use it on Web Street, buy it on Wall Street." He sneers at high-profile Wall Street analysts like Morgan Stanley's Mary Meeker, whom he views as hopelessly behind the curve. "She didn't pick up coverage of Yahoo until last year," he scoffs. "She was two years behind me." His popularity is such that he is on the verge of expanding from his Internet.com base to form a new company. He is thinking of calling it e-harmon.com.

Harmon has indeed been "in sync" with Internet investors. And to give him his due, his analysis of Yahoo (and other Internet stocks, for that matter) has been right on the money. But the truth is that his analysis only partly explained what was driving the stock upward. In the beginning especially, Yahoo's stock wasn't moving as a result of a superior business model. Yahoo's stock was moving because of its small float.

Most of Harmon's readers, after all, are day traders, small investors, and hedge-fund managers who constantly move in and out of Net stocks. They don't much care whether Yahoo the company is a search engine or a directory service; they only want to know whether Yahoo the stock will go up in the short term. So when Harmon and others like him pounded the table for Yahoo, the day traders picked up on that and collectively drove up the stock. With less than three million shares in circulation, it wasn't that hard to make it move. "I want to be in a stock with a two-million-share float," says a New York day trader named Lee Ang, a Harmon fan who works out of the New York branch of the Carlin Financial Group, which rents office space and equipment to day traders. "All you need is the littlest hype, and it will run up."

"This is complete momentum-style investing," adds Mayer Offman, a day trader who holds the title of "chief strategist" at Carlin. "When the Net became popular, you had thousands of people putting most of their money in these stocks." Though Yahoo has become, in Ang's words, "less interesting" of late--in large part because the float is much bigger--it was one of the most popular Internet stocks in the first couple of years it was publicly traded. At a time when it was difficult to buy a block larger than 2,500 shares, Offman knew groups of day traders pushing to buy 10,000 or 20,000 shares at a time. "There were times when you had 20% of the people trading primarily in Yahoo," he adds. "Without these guys, Yahoo would be at a third of the price it is today."

For day traders, says Offman, "valuation is meaningless." Anyone who thought otherwise got his head handed to him. Short-sellers, believing the stock was overvalued, would make periodic runs at it. But these were suicide missions. With the float so small, it was relatively easy for people on the long side to snap up most of the available shares and "squeeze the shorts"--forcing them to capitulate and buy stock to cover their positions, which drove the price even higher. Hedge-fund managers who had started out shorting Yahoo often switched to the other side and began buying it up instead.

This wasn't the only form of capitulation to the power of this stock. There was also a kind of intellectual capitulation, perhaps best exemplified by a man named Bob Walberg. Like Harmon, Walberg is an analyst who writes for an Internet site, Briefing.com. But Walberg did not instantly warm to Internet stocks. Having spent 15 years working at regional brokerages, Walberg thought of himself as an analyst who took "a conservative, value-oriented approach." He was horrified by Internet valuations. And he said so.

Throughout 1997 he harped on the issue of valuation. "After watching short-sellers lose their lunch over the past couple of weeks after being kicked in the stomach by the likes of ... Yahoo," he wrote in one fairly typical July 1997 missive, "it is difficult for Briefing to say one should have any regard for valuations when it comes to high-profile stocks...[but] now that the [second-quarter earnings] are out, what could drive the stock materially higher at this level?" He repeatedly mentioned the high market caps and warned investors that if market sentiment turned, things could get very ugly.

But of course market sentiment didn't turn, and by the early part of 1998, with Net stocks moving faster and higher than ever, Walberg ran up the white flag. That April, after Yahoo had reported yet another quarter in which it had beaten expectations, he wrote: "Of course it is hard to justify the multiples that this issue commands...but as everyone that has tried to short the stock will tell you, it is very difficult to fight the momentum and the following that this issue has experienced since going public." Never again did Walberg make a big deal of valuation. What was the point? He had come to agree with Offman: "Valuation doesn't matter."

"Once you reach the conclusion that it is the supply-demand equation that is moving these stocks, and not valuation, you have to make a choice," Walberg says. "You can ignore what is driving the stocks and opt out of the game. Or you can ignore valuation and stay in the game. We decided we didn't want to opt out. Besides, you have to recognize that investors are trying to pick winners--and Internet stocks have been the big winners." This past December, Walberg penned a darkly brilliant line that summed up his current view of Net mania: "At the heart of the Internet revolution," he wrote, "the most desired thing is Internet stock."

Steve Harmon never had to capitulate on valuations. That's because he had decided from the very beginning that using the valuation "metrics" of the past for Internet stocks made no sense. For one thing, traditional metrics were just going to scare people off. For another, this really was a new world, in his view. "Newspapers will trade at six times cash flow," he says. "Everybody knows that's the deal. Broadcasting is eight to 12 times cash flow. But we don't have any comparable way to gauge Internet stocks." So he decided to invent some metrics that he could apply to Internet companies.

For instance, Internet companies were measuring the growth of their audiences by tallying the number of times a particular Web page is looked at. "What if I took the market value of an Internet company and divided it by monthly page views?" Harmon remembers asking. "What would I get?" He used this metric to compare CNET and Yahoo, and it showed that CNET was trading at a premium to Yahoo on a "page view ratio" basis. "To me," he adds, "that suggested Yahoo was undervalued."

Having decided that this was a useful exercise, Harmon created other measures: Market cap/users; market cap/ad views; revenue/subscriber; market cap/potential market share, and a half dozen others. On the one hand, most of these new metrics were laughable--what did they actually measure? On the other hand, they certainly did suggest that their inventor was "in sync" with the Internet mentality. Harmon had implicitly given up on the idea of comparing Internet stocks with "old economy" stocks. He was saying that the only way to value Internet stocks was to compare them with each other. Relative to, say, Disney, Yahoo's valuation of course seemed completely nuts. But compared with CNET, it didn't look so bad at all--in fact, you could argue that it was undervalued!

Relative valuation--that was the idea. It was an idea soon embraced by Wall Street. By spring 1998, the Street, too, was about to capitulate.

If you ask Yahoo CFO Gary Valenzuela what he thinks about day traders, he gives a fatalistic shrug. "There is not much you can do about them," he says.

And in fact, throughout the period when day traders and hedge funds were driving up the price of the stock--to Yahoo's great benefit--the company ignored them. Instead, Yahoo executives spent their time explaining themselves to Wall Street. That, after all, was the stock-buying constituency they wanted to attract.

In those early days the Street wasn't interested; the Internet thing was just too scary for most big institutional investors. But Koogle and the other execs never let up; they knew that laying the groundwork would serve them well when Wall Street finally woke up to the Internet.

That's why it was so important for Yahoo to show profits early--it didn't want a reputation as another profitless Net outfit whose stock floated on air. It wanted the Street to view it as something real. That's also why Yahoo made such a point of managing--and beating--analysts' expectations.

Koogle and the rest of the Yahoo management team also made a point of not acting like a bunch of wild and crazy startup guys. They stopped talking about how Yang and Filo had developed their site in a trailer full of empty pizza boxes. Instead, they were low key and professional, never talking up the stock and always talking about the business. They dealt in real numbers, not "blue sky" projections. They conveyed the impression that they were grownups who knew how to run a business--precisely the way Wall Street likes to see management act.

Sure enough, by spring 1998 the Street was taking notice of Yahoo. The stock by then had risen 745% from the original IPO price. Its multiple was still astronomical, but Yahoo's ability to deliver great results--while conveying a conservative image--made the dizzying multiple a little easier to overlook.

Besides, by then some 20 analysts were covering Yahoo--up from three after the IPO--and they were all lining up behind the stock. That was the next big step. Lise Buyer picked it up in January. Mary Meeker came on board in April somewhat sheepishly--she was late to the party, she conceded in her first report. And right around then--shortly before Yahoo announced its first-quarter results--the stock really took off. Having split once, and about to split again, Yahoo's float was now well over ten million shares. But there suddenly was much more demand! By July, when the run-up finally ended, Yahoo's market cap had risen from $5 billion to $9 billion.

Which still begged the question that forever hung over Yahoo: How did you explain its valuation? Even though the company kept announcing good results, the multiple kept leapfrogging ahead of those results. In effect, the stock price kept outrunning the performance of the company.

The analysts who covered Yahoo could still love the stock because, like Bob Walberg, they had all gotten their minds into that different place--the place where you acquiesce to the logic of Internet valuations. On some level, it was a requisite for the job. How could you cover these companies, after all, if you didn't deeply believe in the medium and its potential? Sure, they would say, many of these valuations seemed crazy now, but someday some of the companies being built would end up justifying their stock prices. In the case of Yahoo, you had to believe that major advertisers like Procter & Gamble would eventually spend big bucks on the Net. Because Yahoo had already done such a good job of establishing itself as a major Internet brand, it wasn't hard to make the next leap--namely, that when the P&Gs finally arrived, they would spend the lion's share of their ad dollars on Yahoo.

Every Internet analyst made arguments along those lines when visiting clients. Most also had ways of dealing with the question of current valuation that was inevitably raised. Most avoided "old-economy measures" such as P/E ratios, which were so off the charts, and used measures like price-to-sales ratios, which at least looked a little more "normal." (Yahoo's price-to-sales ratio in mid-1998, for instance, was 103.) All relied on relative valuation measures--thus keeping the comparisons within the Internet universe. That was the key, really: Once you viewed Net stocks in relative terms, it all seemed to make sense. Some analysts liked revenue per customer measures, while others pointed to the growing number of visitors to the Websites. One analyst smushed these together and came up with a "value per customer" metric. ("We then take the steady-state per-customer operating income...and apply a dividend discount model to come up with a value per customer," he helpfully explained.) Analysts who liked to crunch numbers favored "discounted cash flow" models as a way of defending the valuations. They made cash-flow estimates five or six years into the future, then worked backward to the present. The problem is that since we know so little about where the Net is headed, predicting cash flow so far into the future is largely meaningless. While it looked like old-fashioned valuation analysis, it wasn't. Rather, it was a kind of disguised justification: an implied acknowledgement by the analysts that investing in this new technology was a bet--just as Graham and Dodd had said back in 1934.

The smart ones, like Buyer, understood that. Having never completely gotten rid of her "valuation bias," she actually wrote a quarterly "valuation report" for her clients. It was primarily an effort to find meaning in relative valuation measures. But she conceded up front that she was still groping for answers. "People expect Internet analysts to have the answer," she says. "But we don't. This is about adjusting on the fly." In one recent report, she joked, "We think the variable that might most explain current relative valuations could well be the number of weekly mentions on CNBC." In that same report, though, she wrote bluntly, "At some level, the attempt to rationally explain the valuations on Internet securities is an exercise in futility."

Does that mean she's down on Internet stocks? Of course not. It simply means that she has to find other criteria. And she has. "I have four tests for an Internet company," she says. "Does someone need what they are doing? Do they have a sustainable advantage? Is there a business model that will lead to profitability? Is the management good?" Yahoo meets her criteria, so it's on her list of recommended stocks. The valuation? It is what it is.

In the end, that's the lesson the stock has imprinted on those who follow it: If you get hung up on valuation, you'll get hurt. Look at what happened to Paul Noglows, for instance. Noglows, the Net analyst for Hambrecht & Quist, had covered Yahoo since late 1996, longer than just about anybody. He loved the company, believed in the model, and pushed the stock. In the early days, he recalls, "clients would laugh at me when I brought up Yahoo." The first time it doubled in price, investors asked if they should sell and take their profits. No, he'd said, stay the course. "I just believed in it," he says. "I had faith."

But in 1998, during the stock's great summer run, his faith wavered. In just five weeks, Yahoo ran up 82%. "It has exceeded the market cap of Viacom," Noglows recalls thinking. Even in relative terms it seemed expensive: It was trading at 37 times estimated 1999 revenues--that was his preferred metric--while its competitors were trading at 14 times 1999 revenues. "I started having a crisis of confidence," he says. So in early July, he downgraded Yahoo, along with AOL, to "hold." His stated reason? Valuation concerns.

For about two months he looked like a genius. Late that summer the market dropped hard in the wake of concerns about Russia, and Net stocks dropped with everything else. But in the fall they turned around and began soaring anew. Noglows upgraded AOL but kept his "hold" on Yahoo because he still thought the stock was overpriced. "It was a big mistake," he says. By the time he finally upgraded the stock this March, it had more than tripled. Now, if you ask him about valuation, he'll give the same answer as Mayer Offman and Bob Walberg: "Valuation is meaningless."

"Do you know why people like me own this stock?" asks Roger McNamee. "We own it because we have no choice."

A general partner of Integral Capital Partners, a Silicon Valley technology fund, McNamee is one of the best-known tech investors in America. He was in on Yahoo's IPO and has owned shares of the company for most of its brief life. He appreciates the "brilliance," as he calls it, of Yahoo's business model and the abilities of Yahoo's management. He likes Tim Koogle a lot. None of that entirely explains why he's of late been loading up on Yahoo and other Internet stocks: "I buy these stocks because I live in a competitive universe, and I can't beat my benchmarks without them." What he thinks about their valuations is irrelevant. "You either participate in this mania, or you go out of business," he says. "It's a matter of self-preservation."

Having gone from hot IPO to plaything of the day traders to darling of the analyst community, Yahoo has taken the final step on its journey to blue-chip status: It has become a "must" for mutual funds and other big institutional buyers of stock. All are under the same pressures to beat the market, which has been increasingly difficult as the S&P 500 has risen at a 20%-plus annual clip in recent years. They are also under pressure not to fill their portfolios with overly risky stocks--holdings for which they can be criticized if the stocks crash and burn.

This past fall, as Internet stocks--ignited by eBay's September IPO--took off once again, desperate money managers finally succumbed. They began buying Yahoo in droves; between last fall and this March, Yahoo's market cap rose from $12 billion to $50 billion (before falling recently to $34 billion), as institutional ownership of the stock climbed to 60%. With 80 million shares now in circulation, says a hedge fund manager, "you can buy a 25,000-share block now without much trouble."

And nobody talks about valuation. Yahoo is a name everybody knows --so it isn't considered as "risky" as an Inktomi or a DoubleClick. Besides, if it should all come tumbling down, who's going to criticize the fund industry for owning it? It's not as though one or two fund managers stuck their necks out.

Of late the analyst community has a new chant about Yahoo, which has brought an additional measure of comfort. The new line is that if the bubble bursts, the big Internet brands--AOL, Amazon.com, eBay, and Yahoo chief among them--will be the ones still standing. Indeed, analysts lump all four together as leaders you can bet on--the "safe" Internet stocks. "If you don't own some of these stocks," SG Cowan analyst Scott Reamer tells his clients, "you're being fiduciarily irresponsible."

"Yahoo has become a blue-chip stock because Yahoo is a blue-chip company," adds Jaime Kiggen, an Internet analyst at Donaldson Lufkin & Jenrette. That is the new party line, and if your world-view is confined to the Internet it makes a certain sense. On the Net, Yahoo is an 800-pound gorilla. But it's no blue chip. Companies with $16 million in quarterly profits and a $34 billion market cap are simply not blue chips, no matter how well they are run. Yahoo has the multiple it has because demand for Internet stocks remains insatiable and because the company's execution so far has been picture perfect. Yet implicit in its market cap is the assumption that everything will continue to work out splendidly for the company--and that the Internet will turn out to be the greatest profit generator the world has ever seen. There is no margin for error in Yahoo's valuation.

But now is not the time to worry about that--at least not on Wall Street. Now is the time to climb aboard. To look at the list of Yahoo shareholders is to realize that pretty much all of Wall Street is along for the ride. Data compiled by Thompson Financial Securities Data show that Fidelity, AIM, Janus, and Alliance Capital are shareholders. So are Mellon Bank, Chase Manhattan, and State Street Bank. Well-known hedge funds like Tudor Investment Management own the stock. The Ford Foundation owns the stock. The IBM Retirement Plan owns the stock.

Are there any holdouts left? Well, there's one at least. The fund managers at T. Rowe Price have yet to buy their first share of Yahoo.

REPORTER ASSOCIATE Tyler Maroney