Dot-Com Bubble (2000)
In the period 1992-2000, the IPO market experienced a major expansion with technology companies that traded with a + $1bl market cap, but had less than $1ml profits. Gradually, the lack of profits caused the dot-com bubble and the NASDAQ crash in 2002.
Causes of the Dot-Com Bubble
- The tremendous growth in Internet users in the 1990s practically forced technology companies to target their customers through the Internet. The expansion of their customer base focused on engaging their target groups through their .com websites in an effort to become leaders in the industry.
- Most technology companies inflated their profits and demonstrated illusionary market growth, although they faced huge debt issues. In addition, corporate corruption evolved in the form of possession of stock options that diluted the company.
- Investors evaluated companies based on their historical data and P/E ratio. Given that profits were falsely reported, companies with losses were evaluated as profitable, thus causing investors to lose huge amounts of money.
- The evolution of the Internet created a new generation of day traders, who were looking for easy and cheap ways to perform profitable trading, while lacking the experience to trade.
- Favorable rating on stocks enabled companies to raise capital although they faced serious financial problems.
- In 2001, a sharp decline by 41 percent equalized the illusionary market growth, putting most technology companies out of business.
- In October 2002, NASDAQ collapsed by 78 percent, mostly as a result of a declining investor confidence in the dot-com companies. From 2000 to 2002, $8 trillion was lost.
Effects of the Dot-Com Bubble
The major effect of the dot-com bubble was a harsh global recession that started in 2001. Cutbacks on salaries, rises in unemployment, soaring oil and food prices, a decline in foreign direct investment, a decline in export revenue and a decline in tourism revenue for the period 2003 – 2009 were the main consequences of a recession that practically hit the global economy.
It is interesting to note that, nowadays, due to the quick and global expansion of social networking sites and relevant Internet activities that attract an increasing number of broadband users every minute, experts fear that there is a high risk of another dot-com bubble, which is being referred to as Bubble 2.0.
On the upside, the NASDAQ crash forced several accounting reforms including the disclosure of balance sheets for listed companies to facilitate better investment decision-making. In addition, restrictions were imposed for active trading with a minimum of $25,000, whereas companies that deliberately implemented deceptive practices were given big fines.