The Internet Bubble - Research Paper Example

During this period, investors believed that a new era had begun with the internet sector seeing a 1000% growth in only two years, which equaled nearly 6% of the US’ market capitalization and more than 20% of equity volume traded publicly in the US. The bubble hit its peak in early 2000 with a score of 5,048.62 on NASDAQ (Kraay & Ventura, 2011). During this period, the sector saw increased establishment of internet companies that were referred to as Dotcom companies, taken from the suffix at the end of their URL.

This bubble burst between the years 2000 and 2002 as NASDAQ saw a loss in value of over 80% with companies, for instance Pets.com, failing completely with more than $7 trillion destroyed in market value (Kraay & Ventura, 2011). This paper seeks to detail what happened during this period, why it transpired, the way it could have been prevented, as well as the main players in the internet bubble.The internet was responsible for creating a euphoric attitude in the 90s, inspiring hopes for the internet as online commerce’s future.

This led to the formation of many dotcom companies hoping that they would be worth millions. However, most of these companies were not very successful as those that were overvalued (Perkins & Perkins, 2009). This resulted in these companies crashing, leaving significant losses to be handled by the investors. The collapse, in fact, precipitated the stock market crash of 2001 more than 9/11 did, costing investors $5 trillion. The mid to late 90s saw unrealistic expectations from the public regarding what the internet had to offer.

Internet entrepreneurs invested in the hope of becoming internet billionaires, inspiring companies like Kozmo, eBay, and Amazon. However, for every internet company that became a success, hundreds of others collapsed. Most investors ignored fundamental rules of the stock market such as the analysis of P/E ratio, reviewing business plans, and the study of market plans (Perkins & Perkins, 2009). They, instead, became pre-occupied with ideas that had no proven potential in the market. Factors that Led to the Internet Bubble Burst Two basic factors contributed to this phenomenon.

The first was the utilization of metrics that were ignorant of cash flow. Most analysts laid emphasis on aspects of individual entrepreneurship that were not concerned with how to generate cash flow or revenue. One theory contends that the bubble burst due to the investors’ pre-occupation with what was referred to as the network theory, which stated that a network’s value increased exponentially. In addition, the number of nodes increased (Adams, 2009). While this made sense, it neglected the company’s ability utilizing the network for cash generation and making the investors a profit.

Secondly, most of the internet company stocks were overvalued. On top of focusing metrics that were unnecessary, analysts made use of high multipliers in formulas and models in the valuation of the companies, resulting in overly optimistic and unrealistic values (Adams, 2009). While the conservative analysts were not in agreement, the recommendations they made were