Dot-com bubble - Business in United States of America
The Event: Rapid rise and sudden fall in the price of Internet sector stocks resulting from overvaluation and the indiscriminate distribution of venture capital
Place: United States
Significance: During the 1990’s, Internet-related businesses were viewed as a way for investors to make quick profits, and millions of dollars were pumped into nascent businesses. After the bubble burst and many of these businesses failed, dotcoms were regarded as bad investments. Ultimately, as the markets settled, it became clear that Internet stocks offered both good and bad investment opportunities.
The period from 1995 to 2001 saw a stock market bubble develop in the Internet sector. A temporary overvaluation of stocks in a particular industry is called a bubble because it acts like a bubble, which grows and then bursts. During much of the 1990’s, however, the growth in the value of Internet stocks was not seen as a bubble but simply as the energetic growth of a promising new industry.
Investors had become enamored with the industry. Following the rise of Netscape and its massive initial public offering (IPO), they were more than willing to invest venture capital in companies that had never made a profit. Some economists said that America was entering the era of a “new economy” in which the old rules of investing no longer applied. The fervor was also fueled by low interest rates and by day traders who bought stocks with borrowed money. Many companies that were formed at the time operated at a net loss to build their market share. In such a business model, one company would have to monopolize a niche to make a profit. The new companies spent their venture capital and then made their IPOs as quickly as possible to raise more cash. The public eagerly bought these new stocks. In 1999 alone, of the 457 IPOs made, 117 doubled in value on the first day of trading. The result was that these stocks became grossly overvalued.
The index tracking the value of stocks on the NASDAQ stock exchange, which includes many technology stocks, reached its all-time high, 5048.62, on March 10, 2000. The index had stood at less than half that value just a year earlier. However, online retailers reported poor results from the previous Christmas season, and some of the bellwether technology stocks processed massive sell orders for billions of dollars. March 13 saw the NASDAQ decline in value by four percentage points, triggering a long slide in the Internet sector.
Some companies were found to have used accounting tricks to overstate their profits. The public quickly lost its faith in technology, and by October, 2002, the NASDAQ had lost 78 percent of its peak value to close at a low of 1114.11. The Federal Reserve cut interest rates to stop the decline, and the economy entered a recession. Ultimately, the bubble wiped out $5 trillion in market value. Very few Internet companies survived the dot-com bubble, with some of the notable exceptions being Amazon.com and eBay. Although the losses in market value and jobs were tremendous, many analysts view the dot-com bubble as a necessary part of learning about the new technology of the Internet and its effect on the economy. As many Internet-only companies disappeared in the wake of the bubble, many brick-and-mortar retailers developed major Internet presences, using their established brands and resources to succeed where firms relying solely on venture capital had failed.
Cassidy, John. Dot. Con: The Greatest Story Ever Sold. New York: HarperCollins, 2002.
Kuo, J. David. Dot. Bomb: My Days and Nights at an Internet Goliath. Boston: Little, Brown, 2001.
Munroe, Tapan. Dot-Com to Dot-Bomb: Understanding the Dot-Com Boom, Bust, and Resurgence. Moraga, Calif: Moraga Press, 2004.
See also: catalog shopping; computer industry; Fiber-optic industry; Google; Online marketing; telecommunications industry.