The Dotcom bubble, also known as the ‘Internet bubble’ or the ‘Information technology bubble’ was a speculative bubble of stock prices of mainly American Internet companies during the time from 1995 until 2000 when many investors believed that a ‘new era’ was upon them. In only two years, the Internet sector grew over 1000% of its public equity and equalled nearly 6% of the market capitalization of the United States and over 20% of all public traded equity volume in the US. It had its peak on March 10, 2000 with a NASDAQ score of 5,048.62. This period was characterized by lots of establishments of companies in the Internet sector. They were called ‘Dotcom Companies’ because of the ‘.com’ in the end of an URL that comes from the word ‘commercial’.
The bubble burst during the years 2000 until 2002 when the NASDAQ lost nearly 80% of its value, many companies like Pets.com failed completely and over $7 trillion in market value were destroyed.
With this paper, the author tries to explain the rise and fall of Internet stock prices during that period. For this purpose, the general causes and characteristics of financial bubbles get described before the application to the Dotcom bubble follows. Additionally, some company examples and survivors and losers of the bubble like pets.com, Webvan or Ebay get introduced. Because the bubble mainly took place in the United States, the author will focus on American company examples and the American stock exchange.
Table of Contents
- 1 Introduction
- 2 Causes and Characteristics of Financial Bubbles
- 3 The Dotcom Bubble
- 3.1 Rise and Growth of the Bubble
- 3.2 Burst of the Bubble
- 4 Company Examples
- 4.1 Losers
- 4.2 Survivors
- 5 Conclusion and Outlook
Objectives and Key Themes
This paper aims to analyze the rise and fall of Internet stock prices during the Dotcom bubble (1995-2000). It will explore the general causes and characteristics of financial bubbles and apply these to the specific context of the Dotcom bubble, focusing on the US market and providing company examples of both successes and failures.
- Causes and characteristics of financial bubbles
- The rise and growth of the Dotcom bubble
- The burst of the Dotcom bubble
- Case studies of successful and unsuccessful Dotcom companies
- The impact of the Dotcom bubble on the US economy
Chapter Summaries
1 Introduction: This introductory chapter sets the stage by defining the Dotcom bubble, also known as the "Internet bubble" or "Information technology bubble," highlighting its rapid growth (over 1000% in two years) and subsequent collapse, resulting in the loss of trillions of dollars in market value. The chapter establishes the paper's objective: to explain the rise and fall of Internet stock prices during this period, focusing on the US market. It briefly touches upon the methodology of the analysis, previewing the examination of general characteristics of financial bubbles before focusing on the Dotcom bubble and then introducing specific company examples.
2 Causes and Characteristics of Financial Bubbles: This chapter delves into the fundamental economic principles underpinning financial bubbles. It defines a speculative bubble as a situation where asset prices exceed levels justified by economic fundamentals, as measured by discounted future cash flows. The chapter likely explores various factors contributing to bubble formation, including psychological phenomena such as herd behavior, market speculation, and the role of investor sentiment. It lays the groundwork for understanding the mechanisms that drove the Dotcom bubble's dramatic growth and eventual collapse by providing a theoretical framework for the subsequent analysis.
3 The Dotcom Bubble: This chapter constitutes the core of the analysis, dissecting the Dotcom bubble's two key phases: its rise and its burst. The "Rise and Growth" section likely examines the factors that fueled the rapid expansion of the Internet sector, including technological advancements, early-stage investment enthusiasm, and the belief in a "new era" of online commerce. The "Burst of the Bubble" section analyzes the factors that led to the dramatic decline in Internet stock prices, possibly including the realization that many Dotcom companies lacked sustainable business models and the subsequent loss of investor confidence. This chapter likely incorporates quantitative data, such as the NASDAQ index's trajectory, to support its arguments.
4 Company Examples: This chapter provides concrete illustrations of the Dotcom bubble's impact through case studies of both successful ("Survivors") and unsuccessful ("Losers") companies. The "Losers" section likely details the reasons for the failure of companies such as Pets.com and Webvan, highlighting factors such as unsustainable business models, overspending, and the inability to achieve profitability. The "Survivors" section showcases the strategies employed by companies like eBay, analyzing how they adapted to the changing market landscape and ultimately thrived despite the overall downturn. These examples serve to illuminate the broader themes discussed in previous chapters, offering specific instances of success and failure within the context of the broader bubble.
Keywords
Dotcom bubble, Internet bubble, financial bubble, speculative bubble, NASDAQ, Internet companies, stock market, economic fundamentals, investor sentiment, company valuations, market capitalization, business models, profitability, case studies, Pets.com, Webvan, eBay.
Frequently Asked Questions: Analysis of the Dotcom Bubble
What is the main topic of this document?
This document provides a comprehensive analysis of the Dotcom bubble (1995-2000), examining its causes, characteristics, rise, burst, and impact on various companies. It explores general principles of financial bubbles and applies them to the specific context of the Dotcom era, using case studies of both successful and unsuccessful companies.
What are the key themes explored in the analysis of the Dotcom bubble?
The analysis focuses on the causes and characteristics of financial bubbles in general, then applies this framework to the Dotcom bubble. Key themes include the rapid growth and subsequent collapse of Internet stock prices, the role of investor sentiment and speculation, the impact of unsustainable business models, and the contrasting fates of various dot-com companies.
What is the structure of the document?
The document is structured into five chapters: an introduction defining the Dotcom bubble; a chapter on the general causes and characteristics of financial bubbles; a chapter detailing the rise and burst of the Dotcom bubble; a chapter presenting case studies of successful and unsuccessful companies; and a conclusion.
What are some examples of companies discussed in the document?
The document uses case studies to illustrate its points. Examples of "loser" companies (those that failed) include Pets.com and Webvan. Examples of "survivor" companies (those that succeeded) include eBay. The analysis explores the reasons for their success or failure within the context of the Dotcom bubble.
What are the key factors contributing to the rise of the Dotcom bubble?
The rise of the Dotcom bubble was fueled by several factors, including rapid technological advancements, early-stage investment enthusiasm, a belief in a "new era" of online commerce, and widespread market speculation.
What led to the burst of the Dotcom bubble?
The burst of the Dotcom bubble was caused by a confluence of factors, including the realization that many dot-com companies lacked sustainable business models, overspending, inability to achieve profitability, and a subsequent loss of investor confidence. The unsustainable valuations of many companies also contributed significantly to the crash.
What methodologies are used in this analysis?
The analysis combines theoretical discussions of financial bubbles with empirical evidence, including case studies of specific companies and likely references to quantitative data such as the NASDAQ index to illustrate the dramatic price fluctuations.
What is the overall conclusion or outlook presented in the document?
While the document's conclusion isn't explicitly detailed in this preview, it is implied that the analysis will offer insights into the dynamics of financial bubbles and the importance of sustainable business models in periods of rapid technological advancement and market exuberance.
What are the key words associated with this analysis?
Key words include: Dotcom bubble, Internet bubble, financial bubble, speculative bubble, NASDAQ, Internet companies, stock market, economic fundamentals, investor sentiment, company valuations, market capitalization, business models, profitability, case studies, Pets.com, Webvan, eBay.
- Quote paper
- Christian Wollscheid (Author), 2012, Rise and Burst of the Dotcom Bubble, Munich, GRIN Verlag, https://www.grin.com/document/197166
