If you were an investor or a follower of the stock market in 2000, you were probably feeling pretty good. After all, the market was up to record highs on the backs of a plethora of companies in the tech sector that were powered by the rapidly-growing potential and presence of the Internet.
You may remember some of their names: Pets.com; iWon.com; AOL.com; Boo.com; theGlobe.com; WorldCom; Startups.com. With the exception of AOL.com – which is now drastically different from the type of company it was at the time – all of these companies are no more. In fact, so many Internet companies – called ‘dot-coms’ – went bankrupt during the crash that it has been called the “Dot-Com Bubble”.
While we still have some companies from that time, companies like Google, eBay, Yahoo!, and Amazon, many Internet-based startups, communications businesses, and tech firms either lost the vast majority of their share value or went out of business altogether from 2000 to 2005. Since then, Wall Street has done a better job of performing due diligence of rising tech companies and largely has avoided a repeat of the crash.
Here, I’ll give you an overview of the Tech Crash of 2001 and what lessons we have learned from this momentous occasion in stock market history.
Before the Crash: The Advent of the Internet
During the 1990’s, the Internet as we know it was born and emerged as entities ranging from corporations to governments sought to take advantage of its power. For the first time in history, mankind could share massive amounts of information at the speed of light using a digital network, a network that offered the potential for mass communication on an unprecedented level.
As the internet grew, tech startups raced to create the infrastructure and branding necessary to craft massive, far-reaching digital networks and reach millions and billions of potential customers. They raised enormous amounts of money from venture capitalists and other institutional investors based on the massive potential shown by the Internet – money that was often secured by companies that had never even reported a profit!
This run-up saw companies like the dot-coms mentioned earlier pile up staggering amounts of debt as they raced to finance infrastructure, expand their networks, advertise through traditional mass media, and grow their user bases, counting on widespread exposure and the seething potential of the Internet as an advertising medium for future revenue.
As a result, a bubble was created as the values of these tech and communications companies became grossly inflated. Remember, many of these companies never turned a profit. Amazon was one notorious example for years as it poured its cash into expansion and growth. Investors began to see the growth potential of these companies as virtually limitless; as a result, NASDAQ more than doubled in value from March, 1999 to March, 2000, peaking on March 10, 2000 at 5,048.62.
The Tech Crash: The Bubble Pops
From that heyday in the spring of 2000, prospects for the “dot-com industry” looked magnificent – until the bubble popped.
One signature event came on April 3, when a federal court declared Microsoft a monopoly. The aftershock sent NASDAQ tumbling all the way to 3,649 before bouncing back slightly to 4,223. NASDAQ, the home for most tech companies, quickly 10% in value; over the next year, losses would accelerate even further.
Over the next few years, vast numbers of dot-coms went under. AOL merged with Time Warner in what would later be viewed as a debacle, jump-starting the gradual and shocking decline of AOL from its position as the world’s leading internet service provider to a company that now just delivers online content with net income of a mere $13 million a year.
From March, 2000 to October, 2002, the stock market as a whole lost roughly $5 trillion in market value. This helped to spark a recession that lasted eight months and shrank GDP by 0.3%. Of course, some of this is attributable to the terrorist attacks on September 11, 2001, but the bursting of the tech bubble put an end to a decade of continual and rampant economic growth in the U.S.
Here is a chart of the Nasdaq:
Wall Street doesn’t always learn lessons, but since the tech crash occurred, investors have done a better job as a whole at paying attention to the financial strength of a company – especially its debt load versus its total assets – instead of buying into bubble-fueled hype.
I’d argue that because of the Tech Crash of 2001, companies like Facebook (FB), Zynga (ZNGA), and Groupon (GRPN) are undergoing more intense scrutiny from investors, analysts, and institutions – which helps to explain how each of these companies have lost substantial market value since their IPOs.
A tech bubble could occur again, but chances are, Wall Street has had its fill of tech stocks growing rapidly without any real rhyme or reason.