Dot-com Burst

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Apurva Dhamankar

12/19/20222 min read

The Dotcom Bubble was an economic bubble that affected stock prices in the technology sector in the United States in the late 1990s and early 2000s. The media's focus on the emerging Internet business, investor speculation about dot-com company profitability, and the buzz around it all served as catalysts for the event.

The Internet has significantly impacted our lives in less than two decades. The Internet has changed almost every other part of our life, including shopping, communication, and news consumption, in addition to the development of business. Many well-known companies as well as startups have gained millions of dollars thanks to the Internet, and many more anticipate doing the same. However, the infamous "dot-com boom" of the second part of the 1990s was brought on by entrepreneurs' overly high predictions of the potential of the Internet.

As a result of speculative investing, market overconfidence, an excess of venture capital funding, and the inability of Internet firms to make a profit, eventually developed into what is now known as the dot-com bubble. Both venture capitalists and ordinary investors poured money into Internet-based businesses in the hope that they might one day turn a profit, eschewing all caution in search of a chance to profit from the burgeoning dot-com novelty vision.

Even if the price of tech stocks surged much beyond their fundamental value and increased considerably faster than their counterparts in the real sector, many investors still believed that Internet-based businesses would prosper simply because the Internet was a technological advancement. Investors were therefore more than prepared to ignore basic firm analysis using indicators like the price-earnings (P/E) ratio and rely their confidence on technical developments in their quest to uncover the next big dot-com. A market-wide overvaluation of Internet companies resulted from, for instance, the IPOs (Initial Public Offerings) of companies that had not yet produced any revenue or profits, possessed no proprietary technology, and, in many cases, had no finished product. These ludicrously high prices led to an overwhelming.

What caused the dot-com bubble?

  • Use of metrics:

Numerous analysts concentrated on facets of certain organizations that had nothing to do with how they made money or how much cash they had coming in. One argument holds, for instance, that the Internet bubble burst as a result of an obsession with the "network theory," which claimed a network's worth increased exponentially as the number of nodes increased. Although this idea made sense, it ignored one of the most crucial parts of network valuation: the company's capacity to use the network to create revenue and make money for investors.

  • Overvalued Stocks:

The Analyst’s models and algorithms for valuing Internet companies used had very large multipliers in addition to their attention on pointless measures, which led to unrealistic and unduly optimistic prices. Although more cautious analysts disagreed, the massive amount of enthusiasm surrounding Internet companies in the financial sector essentially drowned out their suggestions.

Thank you.

Regards,

Omkar Sutar,

Kautilya, IBS Mumbai.

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