What is the Dotcom Bubble?

What is the Dotcom Bubble?

The dotcom bubble was a rapid rise in U.S. technology stock equity valuations fueled by investments in Internet-based companies during the bull market in the late 1990s. The value of equity markets grew exponentially during this period, with the technology-dominated Nasdaq index rising from under 1,000 to more than 5,000 between the years 1995 and 2000. Things started to change in 2000, and the bubble burst between 2001 and 2002 with equities entering a bear market.

The crash that followed saw the Nasdaq index, which rose five-fold between 1995 and 2000, tumble from a peak of 5,048.62 on March 10, 2000, to 1,139.90 on Oct. 4, 2002, a 76.81% fall.

 By the end of 2001, most dotcom stocks went bust. Even the share prices of blue-chip technology stocks like Cisco, Intel, and Oracle lost more than 80% of their value. It would take 15 years for the Nasdaq to regain its peak, which it did on April 24, 2015.

Introduction of Dotcom Bubble

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.

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.

Share prices of internet companies increased much faster and higher than their peers in the real sector due mostly to speculation caused by the excitement and euphoria of the new internet age. As a result, it led to a market-wide over-valuation of internet firms relative to their intrinsic value.

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The bursting of the bubble caused market panic through massive sell-offs of dotcom company stocks, driving their values further down, and by 2002, investor losses were estimated at around $5 trillion.

How the Dotcom Bubble Burst

The 1990s was a period of rapid technological advancement in many areas. But it was the commercialization of the Internet that led to the greatest expansion of capital growth the country ever saw. Although high-tech standard-bearers, such as Intel, Cisco, and Oracle, were driving organic growth in the technology sector, it was upstart dotcom companies that fueled the stock market surge that began in 1995.

The bubble that formed over the next five years was fed by cheap money, easy capital, market overconfidence, and pure speculation. Venture capitalists anxious to find the next big score freely invested in any company with a “.com” after its name. Valuations were based on earnings and profits that would not occur for several years if the business model actually worked, and investors were all too willing to overlook traditional fundamentals.

Companies that had yet to generate revenue, profits, and, in some cases, a finished product, went to market with IPOs that saw their stock prices triple and quadruple in one day, creating a feeding frenzy for investors.

The Nasdaq index peaked on March 10, 2000, at 5048—nearly double over the prior year. Several of the leading high-tech companies, such as Dell and Cisco, placed huge sell orders on their stocks when the market peaked, sparking panic selling among investors. Within a few weeks, the stock market lost 10% of its value.

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Dotcom Bubble Effect on the Economy

Not only did the dotcom bubble cause a mild recession, but it also shook the confidence in a new industry, which had a far more lasting effect. It was so widespread that even successful companies that had a long and profitable business took a hit.

For instance, the stocks of Intel, which was in the financial market since the 1980s, crashed from $73 to around $20 to $30. The company was not directly related to the dotcom bubble, but it was affected nevertheless. At the time, prices are higher than during the 2000s, but they took a long time to grow up again.

Overall, the effect was much worse for investors than for the companies. According to the New York Times, about 48 percent of all dot-com firms survived the crash, although most of them lost a significant portion of their value. For example, the sudden spike in the issuance of IPOs by new technology companies, including GameStop and many technology stocks reaching all-time high in 2021 have concerned many investors of a potential economic bubble.

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