dot-com bubble

The dot-com bubble, also referred to as the Internet bubble, refers to the period between 1995 and 2000 when investors pumped money into Internet-based startups in the hopes that these fledgling companies would soon turn a profit.

The dot-com bubble, also referred to as the Internet bubble, refers to the period between 1995 and 2000 when investors pumped money into Internet-based startups in the hopes that these fledgling companies would soon turn a profit. The speculative investments in dot-coms (so named for the ".com" domain used by companies doing business on the Internet) drove up equity markets. The technology-centric NASDAQ Composite Index rose from less than 1,000 in 1995 to a peak of 5,408.60 on March 10, 2000.

In the rush to cash in on the Internet boom, many investors ignored traditional investment metrics, such as the ratio of a company's current share price compared to its per-share earnings (P/E ratio). Instead they subscribed to a business model that favored building brand awareness and market share quickly, even if that required offering services or products for discount prices or for free. Low interest rates in 1998 helped drive up the amount of capital invested in dot-coms. Advances in technology infrastructure and a growing understanding of the Internet enabled people in developed countries to easily get online. These factors, combined with the seemingly overnight fortunes made by some of the startup founders whose companies went public, fueled the exuberance. (Some technology industry analysts argue the bubble actually began in the early 1990s, when the concept of an "information superhighway"[REL1]  was popularized.)

The dot-com bubble started to collapse in 1999. In 2000, companies such as Pets.com declared bankruptcy and by 2001 the bubble had burst, taking many dot-coms -- or "dot-bombs," as investors started calling them -- with it. The trillions of dollars in market value lost during the crash of the stock market between 2000 to 2002, coupled with the financial damage inflicted by the 9/11 terrorist attacks, led to widespread layoffs in the technology field.

The "new economy" defined by the Internet boom, however, also produced some notable successes. Among the estimated 48% of the dot-com companies that survived through 2004 are current Internet giants Amazon, eBay and Google.

Some business historians fear there is another tech bubble, citing Facebook's $19 billion purchase of messaging service WhatsApp announced in February 2014 and other high-priced acquisitions by technology giants such as Google.

 

This was first published in August 2014

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