Dot-Com Bubble

What Is the Dot-Com Bubble?

The Dot-Com Bubble was a speculative bubble in the stocks of internet and technology companies during the late 1990s. Share prices of many firms, including many with little or no profit, rose sharply as investors became excited about the internet's potential. The bubble peaked in early 2000 and deflated over the following two years, when many of these stocks lost most or all of their value. The name refers to the ".com" suffix used in many of these companies' web addresses.

How the Bubble Formed

Several forces pushed prices up. Growing internet access and online commerce convinced many investors that the web would transform nearly every industry. Companies often went public through an initial public offering soon after launch, and their shares frequently rose sharply on the first day of trading. Because many of these businesses had no earnings, traditional measures such as the price-to-earnings ratio could not be applied. Investors often focused instead on user growth, website traffic, or the size of the opportunity. Some companies changed their names to include internet references, hoping to attract attention. The Nasdaq Composite, which contained many technology stocks, rose dramatically before reaching its peak.

The Collapse

Prices began falling in 2000 as investors reassessed valuation levels and many companies ran out of cash. Some well-known businesses, such as the online pet supply retailer Pets.com, shut down. The Nasdaq Composite lost roughly three-quarters of its value from its peak to its low in late 2002. A recession in 2001 added pressure by reducing corporate spending and investment.

Why It Matters to Investors

The episode is often cited as an example of how market capitalization and enthusiasm can drift away from underlying business fundamentals. It also led to greater scrutiny of corporate accounting and of analyst research, and it showed that high growth expectations do not guarantee long-term returns. Many internet companies did survive and later grew substantially, showing that the underlying technology had lasting value even though many individual stocks did not.