(FORTUNE Magazine) – By now most people know all about laser eye surgery. You walk into a doctor's office with Coke-bottle lenses, and some 30 minutes later walk out with restored vision. Not surprisingly, the number of lasered eyes in the U.S. has skyrocketed from about 200,000 in 1997 to an estimated one million in 1999.

So you'd think that Visx, the company whose equipment is used in some 80% of U.S. laser eye surgeries, would be on fire. And it was. In early 1999, Visx's stock cost $20; by July it had quintupled to $102--or an Internet-like multiple of more than 30 times revenues. But in the past few months,Visx has dropped some 70%. Its story is a good reminder of how Wall Street can be blind to flaws in superstar stocks.

It's easy to see why investors fell in love with Visx. Revenues were doubling every quarter, and the company boasts a net margin of over 30%. The key: In addition to selling lasers, Visx charges doctors a $250-per-procedure license fee, giving it a razorblade-like recurring revenue stream. Since Visx's portfolio of some 150 patents appears to blanket the most popular form of laser eye surgery, analysts expected that new competitors would have to pay Visx too.

Unfortunately for Visx investors, it may not work out that way. About a year ago, Visx filed a complaint with the International Trade Commission to stop Nidek, a privately held Japanese company, from bringing its lasers into the U.S. To Wall Street's surprise, an ITC judge said on Dec. 7 that Nidek hadn't infringed on Visx's patent. Amid a rash of after-the-fact downgrades from Street analysts, Visx plummeted 41%.

Then, on Jan. 19, Visx shocked the Street again when it reported that its fourth-quarter procedure volume was flat. It seems that Visx's customers were getting fed up with its prices. Its competitor, Summit Technology, reported procedural growth of 12%. Another round of downgrades followed, and the next day Visx crashed another 30%.

As they say, hindsight is 20/20. But there were clues. Kate Sharadin, an analyst at Preferred Capital Markets, noted on Oct. 1 that Visx's big customers had been complaining about its pricing. Perhaps more important, Visx has had a contentious legal history, including a complaint by the Federal Trade Commission alleging that Visx fraudulently obtained one of its key patents. Visx is also battling with Nidek overseas, and although there are differences in U.S. law, both British and Canadian courts have sided with Nidek. Since last spring some Visx officers, including CEO Mark Logan and VP of regulatory affairs David Patino, have sold significant amounts of shares.

Analysts use phrases such as "limited visibility"--no pun intended--about Visx's future. Without that recurring- fee revenue, Visx's business turns into low-margin equipment sales in an increasingly competitive market.

Visx could still find victory in the courtroom. It has a case pending against both Nidek and doctors who use Nidek equipment. But rescue by lawsuit is slow and far from sure, especially since the U.S. Patent and Trademark Office is also reexamining one of Visx's key patents. Even at its current below-market P/E, Visx is a risk not worth taking.