In early August 2018 we came across an article saying that “..stocks are as pricey as they were during the dotcom bubble”. This made us reminisce about one of the largest drops in the U.S. stock market’s history, especially for the NASDAQ.
But what exactly caused the Dotcom Bubble and where are the companies involved in it now?
The Dotcom Boom
Before the bubble burst there was of course a period of growth which started around 1995-96 when the first internet companies were coming to the fore. They promised a new future where every service and product would be available through the World Wide Web.
A new generation of companies with a .com suffix, commonly known as dotcoms, were being created at an exponential rate, mirroring traditional businesses that provided something at physical locations but increasing access and speed of delivery.
One of the most popular examples at the time was Pets.com. There you could find every pet food and product listed on your screen with prices and descriptions and all you needed to do was order it, or find out where you could buy it. This was one of the first examples of a business where something we take for granted today was introduced. You no longer had to find addresses and phone numbers, or rely on adverts and other people to get reliable information. It was at your and everyone else’s fingertips.
Venture capital had just entered its own renaissance and poured into these companies, with hedge funds sensing a golden opportunity to multiply their money. Stock prices skyrocketed and the NASDAQ, home to most of the dotcoms, jumped from 1000 in 1995 to around 5000 in 2000.
There were several other factors fuelling the boom.
The proliferation of sharing information over the internet allowed the popularity of these companies to spread like wildfire. But in many cases the mass audience hadn’t matured enough to research what the business model they were investing in actually was. Or if there was a business model.
1997 also saw the arrival of the Tax Payer Relief Act which lowered the overall Capital Gains Tax, spurring people to invest even more in stocks.
The Dotcom Bubble Bust
On March 10th, 2000 the NASDAQ reached its summit at 5,048 points. At the top of the bubble, several of the companies started to show the first signs of weakness.
A mix of factors combined to push the dotcoms over the cliff. Japan entered a recession several days after the peak, the dotcoms spending without generating revenue became public in an article by Barron’s and Microsoft were defined as a monopoly on April 3rd. The latter prompted a 15% decline for MSFT and an 8% drop for the NASDAQ on that day.
Friday, April 14th was even worse, seeing a 9% fall for the index in a week that saw it lose a quarter of its value.
Indirect factors helped along the way – the September 11th attacks and the Enron scandal caused even more fear among investors, stopping any hope of further investments into many of the early dotcoms.
At the end of the drop, commonly accepted as October 9th, 2002, the NASDAQ had lost 78% of its peak value and companies like Pets.com, eToys.com and Webvan were history.
Ultimately investors weren’t wrong to put their money in some of these companies. Amazon is a glowing example of that.
As the Internet itself matured, so did the companies taking advantage of its vast potential and so did retail and institutiotnal investors. Money became smarter and has given us the current generation of tech giants like Facebook and Netflix.
Will they, together with the old guard like Google, Microsoft and Amazon weather the next storm? We’ll have to wait and see. Until then you can read about other interesting things from the past of the stock market in our history lessons section.