DOTCOM BUBBLE |
| Credit: Steemit |
What is Dotcom Bubble?
• The dotcom bubble was a rapid rise in U.S. technology stock equity valuations fueled by investments in Internet-based companies in the late 1990s.
• The value of equity markets grew exponentially during the dotcom bubble, with the Nasdaq rising from under 1,000 to more than 5,000 between 1995 and 2000.
• Equities entered a bear market after the bubble burst in 2001.
• The Nasdaq, which rose five-fold between 1995 and 2000, saw an almost 77% drop, resulting in a loss of billions of dollars.
• The bubble also caused several Internet companies to go bust.
Understanding Dotcom Bubble
• The dotcom bubble, also known as the Internet bubble, grew out of a combination of the presence of speculative or fad-based investing, the abundance of venture capital funding for start, and the failure of dotcoms to turn a profit.
• Several online and technology entities declared bankruptcy and faced liquidation - namely Pets.co., Webvan, 360Networks, Boo.com, eToys, etc.
• However, other internet-based companies struggled but survived and are giants today, notably Microsoft, Amazon, eBay, Qualcomm, and Cisco.
• The dotcom bubble is also associated with the NASDAQ Composite index, which rose by 582% from 751.49 to 5.132.52 from January 1995 to March 2000. The NASDAQ fell by 75% from March 2000 to October 2002, erasing most of the gains since the bubble started building.
Causes of the Dotcom Crash
• Overvaluation of dotcom companies: Most tech and internet companies that held IPOs during the dotcom era were highly overvalued due to increasing demand and a lack of solid valuation models. High multipliers were used on tech company valuations, resulting in unrealistic values that were too optimistic. Analysts did not focus on the fundamental analysis of these businesses, and revenue generation capability was overlooked.
• The abundance of venture capital: Cheap funds obtainable through very low interest rates made capital easily accessible. It coupled with fewer barriers to acquiring funding for internet companies led to massive investment in the sector, which expanded the bubble even further.
• Media frenzy: Media companies encouraged people to invest in risky tech stocks by peddling overly optimistic expectations on future returns and the "get big fast" mantra. Business publications - such as The Wall Street Journal, Forbes, Bloomberg, and many investment analysis publications - spurred demand through their media outlets adding fuel to a burning fire and further inflating the bubble. Alan Greenspan's speech on "irrational exuberance" in December 1996 also set off the momentum on technological growth and buoyancy.
Why did the dotcom bubble burst?
• The dotcom bubble lasted about two years between 1998 and 2000. The time between 1995 and 1997 is considered to be the pre-bubble period when things started to heat up in the industry.
• The dotcom bubble burst when capital began to dry up. In the years preceding the bubble, record low-interest rates, the adoption of the Internet, and interest in technology companies allowed capital to flow freely, especially to startup companies that had no track record of success.
• Valuations rose and money eventually dried up. This led companies, many of which didn't even have a business plan or product, to collapse, causing the market to crash.
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