Remembering the Bursting of the Dotcom Bubble

Voleo  |

As the popularity of the internet started to rise in the mid-90s, so did companies that operated online. During the dotcom bubble, investors were getting rich off unprofitable stocks with high prices and higher price/earnings ratios. They were buying shares without looking at business plans or finding out if they were profitable.

As these companies received large amounts of funding, they started to spend significant amounts on marketing and advertising to build brand awareness and get customers. However, their business plan was not entirely sound. Let’s take Pets.com for example. After spending large amounts to build brand awareness and warehouse infrastructure, they did not perform market research to determine the size of the market or whether people would actually buy online. Also, to compete with brick and mortar stores, Pets.com sold products at prices below cost, essentially losing money on most sales.

As the dotcom bubble began to burst, funding dried up, and not long after, Pets.com closed down. The company only lasted 268 days from IPO to liquidation. Many other companies also reported losses and folded soon after.

Taken from Flat World Business

At the highest point of the dotcom bubble, in January of 2000, NASDAQ closed above 5000. In April of 2000, an inflation report caused the speculative bubble to burst and huge investment losses. By 2002, NASDAQ was down to 1535.

Not all was lost during these turbulent times. Amazon (AMZN), Google (GOOG), and Microsoft (MSFT) managed to survive, although suffered heavy losses.

(Photo by K W Reinsch)

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer.


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