From the moment Yahoo! (Nasdaq: YHOO) held its initial public offering, it has been the whipping boy of old-school, book value-type investors. Even with a closing valuation of $1 billion on that fateful day in 1996, Yahoo! caused some paroxysms from those who believed that no essentially assetless company should command such a lofty valuation.

Imagine the disbelief that ensued as the company, fueled primarily by its own internal growth, grew more than 100-fold in price, peaking above $140 billion in market cap at the beginning of 2000. By this time, Yahoo! executives were being quizzed about their interest in purchasing such old-line media companies as Disney (NYSE: DIS), the owner of ESPN, ABC, the mouse, and movie properties galore. Seems like eons ago, but it was really only 15 months -- around the same time AOL Time Warner (NYSE: AOL) was moving toward inevitability.

What now? Yahoo! stated that first-quarter 2001 earnings would be flat and that, due to rapid weakening in online ad sales, it could give no visibility at all for the remainder of the year. Seeing as almost every on- and off-line media organization had already made the same observation, advertising-dependent Yahoo!'s difficult situation is hardly surprising; the stock market had built it in ever since Yahoo! guided earnings lower in January.

That Chairman and CEO Tim Koogle was kicking himself upstairs in favor of a new, as-of-yet-unnamed chief executive was also not unexpected, though the timing and awkwardness of the circumstances bespoke of some disorganization at Yahoo! Koogle was in New York Wednesday to speak at a Merrill Lynch analyst conference, but suddenly cancelled. The company's announcement came later the same day, but not before trading in its stock had been halted for more than six hours.

You can read the details of "Yahoo!'s Excellent Adventure" all over the Web. It is inescapable. I am interested, however, in another facet of this story. Although there have been hundreds of pundits who called Yahoo! overvalued during its moonshot, I do not recall any predictions whatsoever that Yahoo!'s sales would actually decline between 2000 and 2001. The company's growth was treated as fait accompli; whether it could ever grow enough to justify its lofty valuations was subject to intense debate. But what were the signs that Yahoo! was preparing to crumble?

I submit that these signs came about almost too quickly to assimilate. Yahoo!'s transformation into a slow-growth monster came about so fast that, although the short-term market for the company seemed poor, its position as the center of online media seemed assured. Although the downturn in ad revenues was well- covered, many thought Yahoo!'s position as the largest site with the highest viewership would help it turn the corner.

The theory was that advertisers would pay a premium to be on Yahoo!, further marginalizing its competition. While this is a plausible and deeply attractive theory, in actuality the market failed to protect even the strongest players. In this way, the Internet has followed -- although at a much faster rate -- a trail blazed by the airline industry: Where there were once hundreds of carriers, the industry is now dominated by a few, but these companies have for the most part been miserable creators of free cash flow.

How could Yahoo! -- a company that was growing its top line at more than 100% annually just a year ago and had gross margins that exceeded 80%, rapidly scaling net margins, and free cash flow of almost 30% -- turn downhill so fast? (I'm not talking about Yahoo! the stock. At almost no point on its growth trajectory has it offered shareholders much in the way of a margin of safety, with such astonishing valuation multiples as a price-to-sales ratio of 236. Yahoo! could have performed perfectly -- and the Internet could have been the perfect wealth-creation model it was billed to be -- and the company could have still managed to be a poor investment.) The bigger question is what good fundamental analysis is when a company that shows every characteristic of a superior business could still falter so badly, so quickly.

Unfortunately, the answer is exactly what it was when attempts to value Yahoo! caused even the most practiced income modelers to scratch their collective heads. In an immature business, most of the assumptions that are made are just that: assumptions, guesses of the most unpredictable kind. We had all the signs that Yahoo! could place itself at the center by charging other contributors to provide content on its site. What we did not know was the number of contributors willing to pay Yahoo! was significantly less than first predicted.

This is not to say that Yahoo! has tapped out its market, but there is no longer a panic to get representation on its chunk of prime Internet real estate. Yahoo!'s inability to generate more revenue from its visitors -- in 2000, revenue per visitor averaged only about $1.60 -- means that all of Yahoo!'s positioning is fruitless if the market doesn't yield money. It is a situation that is being discussed in nearly every nook and cranny of the Internet: "Fine, we've got visitors. How do we profit from them?"

Where the uncertainty for the Internet once meant unending possibilities for the likes of Yahoo!, it now means uncertainty. But where some of the companies that once commanded top dollar are now objects of ridicule because their business plans lacked plans, Yahoo! still seems extremely well-managed and blessed with a wonderfully light corporate structure. It's a company built for profitability -- but its addressable market has proven ornery in giving up actual profits.

Yahoo! the stock should go down as a monument to unbridled enthusiasm, bid up as it was to absurd heights without any evidence whatsoever that a sufficient market existed to support it. Yahoo! the company, however, remains more of a conundrum. This is no Amazon.com (Nasdaq: AMZN): Yahoo! still has more than $1 billion in cash, no debt, and huge net margins. It's one of those confounded "great companies" that lures unsuspecting investors in with a sterling operating history and hypergrowth, massive margins, and excellent cash creation, only to falter badly when the environment changes. In Yahoo!'s case, Internet growth was taken as a given, and the "proof" of Yahoo!'s past performance was a powerful enticement, despite the nosebleed status of its stock price.

The enduring lessons here are many. First, even the greatest companies can be too expensive. Second, companies that have never had to operate in adverse environments may do the unexpected when the inevitable downturn comes. Most importantly, past performance is no guide for future returns, especially in immature industries. It may seem, at this point, that the Internet has been around forever. It has not, and the financial environment that Web-based companies operate in is still very much in flux. Analysis of past fundamental performance will be unlikely to pick up these nuances.

As such, unless you have some insight that puts you at a distinct advantage to anticipate future developments in an immature industry, it may be more financially healthy to let these "opportunities" pass you by.

Fiat Fool!

Bill Mann, TMFOtter on the Fool Discussion Boards

[For another Foolish take on Yahoo!, check out today's Rule Maker Portfolio report, "Sticking With Yahoo!"]

Bill Mann can drop some science on you. At time of publication, Bill did not have beneficial interest in any of the companies mentioned in this article. The Motley Fool is investors writing for investors.