We hear the phrase Tech Bubbles quite often. Even more popular is the phrase dot com tech bubble. What do they mean? How did they come about? In an increasingly digital age with continuous technological advancements, we get innovative new tech companies every now and then. We will investigate what these companies have to do with tech bubbles and how these bubbles eventually burst.
What are tech bubbles?
A tech bubble relates to a sudden and unsustainable market rise due to increased speculation in technology stocks. These speculations lead to swift share price growth. Usually, bubbles form when excessive capital is accumulated, usually at the ending phases of a credit cycle, and is desperate in its search for alphas in saturated markets. Even though value may be initially created, a huge number of the Initial Public Offerings (IPOs) will fail.
Tech bubbles may come about due to technology stocks in specific technological areas or may take the tech industry as a whole. At the peak of the bubble, many tech companies seek to go public and release their IPOs to capitalize on the market hype. Investors buy these stocks at overinflated values by capitalizing on the bubble, and when investors eventually realize this, the bubble bursts.
The Dotcom Tech Bubble of the 1990s
The most famous tech bubble was the dotcom tech bubble of the 1990s. This came about due to increased technology stock equity valuations caused by investments in internet-based companies in the 1990s. the 90s internet was an increasingly popular place with new companies emerging and seemingly thriving. Cisco, Oracle, and Intel’s stock were on the rise. The companies were providing all the new startups and companies with their technological requirements.
Investors invested money into internet startups during the 90s hoping that those startups would eventually become profitable. Most of these investors and venture capitalists abandoned a cautious approach for fear of not being able to capitalize on the increased usage of the internet. This led to investors freely pouring money into any company with “.com” in it, looking to find the next big thing. Valuations were based on future profits that had not even been incurred yet, leading to over-inflation of stock prices.
How the Bubble Burst
As these internet companies started to gain funding, the competition got stiffer. They were getting huge capital influxes and were under pressure to grow and become profitable quickly. By 1999, 39% of ever “venture capital investments” were going to internet startups. That year, 295 of the 457 IPOs were of internet companies, followed by 91 in the first quarter of 2000.
The “Nasdaq index” was at its highest on March 10, 2000, at 5048. This was near twice the amount of the previous year. Right when the market was at its peak, many leading tech companies like Dell and Cisco placed huge sell orders on their stocks. This led to panic selling among investors. Within a few weeks, the stock market dropped 10% in valuation. As capital from investments dried up, dotcom companies who relied on these cash-heavy investments lifeline. Those companies who had capitalized on the tech bubble lost hundreds of millions of dollars within months, becoming essentially worthless. As 2001 ended, several publicly traded dotcom companies gave up and closed shop, leading to wastage of trillions of dollars of capital investments.
However, there are several famous companies that survived the bubble. These include Amazon, eBay, and Priceline.
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What do you think about the dotcom tech bubble? Do you think another tech bubble may soon be on the rise, with the likes of bitcoin and mobile applications becoming popular? Let us know in the comments below!