The Dot-Com Crash
When: March 2000
Where: Across the globe where ever technology and particularly Internet stocks were traded
Percentage Lost From Peak to Bottom: The NASDAQ Composite lost 78% of its value as it fell from 5046.86 to 1114.11.
- The U.S. military created the Internet for its own use. During its inception the internet's commercial usage was vastly undermined. In 1995 the Internet had an estimated 18 million users. The kind of scalability this business could derive was beyond comprehension of even its initial founders.
- In the initial years of its launch hype over lapped hope. Entrepreneurs were busy incubating Internet start-ups as they mushroomed from garages to drawing rooms. The gain in stock prices increased the investors' confidence. The price ticker running at the bottom of the CNBC channel was deciding whether you were right with your investments or not.
- While all the newly floated web sites generated viewerships they lacked a strong revenue model. Investors were therefore betting on the premise that if you can have eye balls and web site hits you will have revenue to back it up some day - but when was the question.
- AOL traded at a Pe of 305 times earnings while its peer IBM traded at 28 times. Simply put the market was placing a greater degree of confidence on AOL then it did on IBM.
- AOL and Amazon were the better quality Internet plays . For each of the AOL's and Amazons there were dozens of start up ideas that offered shares to the public without having a definite revenue model.
- Stocks sold on ideas and as investors chased one stock after another. A new tool for evaluating internet companies was identified - evaluate companies on the basis of web site hits and eye balls. People talked about a market cap to eyeball ratio.
- Big ideas sold more then business plans. The new buzzwords were eyeballs, web site hits, networking, information technologies, Internet, consumer-driven navigation, tailored web experience. This hollow twist to investment analysis changed the normal way of evaluating companies.
- You could not evaluate these companies on PE because they said the earnings would grow exponentially and the PE was artificially enlarged. The discounted cash flow statement could not be made because not even the promoters them selves were unsure about how their cash flow models would look like. These companies could not be evaluated on market cap to sales basis since the market cap was bid in some cases several hundred times over the sales.
- The IPO's of Internet companies emerged with amazing frequency It swept the entire spectrum of global investors into a euphoria. Investors were blindly grabbing every new issue without even looking at a business plan. Satyam Computer a leading IT services company in India bought a website portal for Rs 500 crores.
- The market had to give way finally and it did. Some people had to identify the emperor without clothes. As companies reported losses a few folded outright within months of their offering. In 1999 the US market saw 457 IPO's, most of which were Internet and technology related. Of those 117 doubled in price on the first day of trading. In sharp contrast the year 2001 saw a meager 76 IPO's with none of them doubling on the first day of trading.
- Many argue that the dot-com boom and bust was a case of too much too fast. Companies that could not decide on their revenue models were valued at billions of dollars in anticipation for profitable growth.