The Dot Com Bubble Burst: Why Is It Important To Heed The Lessons From It Even Today
A Story Worth Telling Even Today!
The prices of tech stocks are surging right now, especially being fueled by the pandemic since the whole world has moved online. But the fact that some massive tech companies like Twitter, Snapchat are still running in losses cannot be ignored. Amid these times, it is being speculated by some that we might witness Internet Bubble 2.0 soon.
In this blog, we will go back two decades to the early 2000s and take a look at the Dot Com Bubble Burst and understand why it is important to heed to lessons from it even today.
Let us first understand, what was the Dot-Com Bubble to begin with…
It was the 1990s, the tech industry was booming and every investor and venture capitalist was pouring in money into any internet startup that simply had a .com attached to it. With the advancement of technology, investors were touting that these internet companies would “change the world”.
They were hoping that these tech companies would one day be fetching them massive amounts of profit. Everyone was banking on the internet and no one wanted to be left behind to turn profits from this technological race. That led to a surge in speculative investing and overvaluation of tech stocks.
With huge amounts of money flowing in, most of these tech startups had entered a competition to get big and get big fast! In fear of losing out, investors had turned a blind eye to the fact that many of these companies weren’t even generating revenue let alone a profit yet. Many of them were spending half of their capital in advertising to attract more customers. Some of the companies whose stock surged didn’t even have a finished product.
This ultimately had led to the formation of a tech bubble that was driven by market overconfidence and pure speculation. And we all know what happens when a bubble gets too big. It bursts!
A few key points to note are, and I am sharing the following facts from an Investopedia article -
- The tech dominated Nasdaq index rose five fold between the years 1995 and 2000.
- In 1999, shares of Qualcomm rose in value by 2,619%, 12 other large-cap stocks each rose over 1,000% in value, and seven additional large-cap stocks each rose over 900% in value.
- When the bubble burst, the Nasdaq index fell as much as 76.81% all between a short span from March 2000 to October 2002.
- Even the share prices of large companies like Intel and Cisco dropped by more than 80%.
- It took 15 years for the Nasdaq to regain its dotcom peak, which it did again in April, 2015.
How did the Dot Com Bubble burst?
Right when the market was at its peak, several of the leading high-tech companies like Dell began to sell their stocks in large amounts. This led to panic selling among investors. Slowly as investment capital began to dry up, the dotcom companies that had reached market capitalization of millions of dollars became valueless in a matter of months.
To quote an Ideas.Ted.com article, “By 1999, losing money was the mark of a successful dot-com. Over the second half of 1999, it wasn’t a question of whether or not a bubble existed, it was a question of how big a bubble it was, and when it would pop. Most people knew it was unsustainable, but no one wanted to admit it.”
By the end of 2001, a majority of publicly traded dotcom companies closed down. The huge sums of investment capital had all evaporated. And who bore the brunt of this loss? Well, most bankers and VCs profited from the huge IPOs so finally it was down to the individual investors to suffer.
Coming to the most important part- How are the lessons from the Dot Com bubble relevant even today?
Right now with the pandemic, the tech stock prices have gone soaring again since the whole world has moved online.
A Moneycrashers report states, “It seems as though perhaps the world did not learn its lessons from the first Internet bubble. The introduction of social media has led to a new Internet obsession which may be turning into another dot-com crisis. “
Moreover we cannot ignore the fact that we have some massive companies like Twitter, Uber, Snapchat and Spotify that are running in losses and are yet to turn a profit.
This results in the likelihood of an impending tech bubble. But it is also to be noted that the companies due to which the tech stocks are currently surging are well established companies unlike the newly formed startups of the 1990s.
Even if there is a bubble, according to several analysts as stated in an article in The Guardian, we are in the “foothill phase of the bubble formation”. The dominance of tech seems unharmed for now at least. What happens next, only time will tell!
That’s all! Thanks for reading the entire way! Do leave your feedback.😄
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