One of the most memorable companies accompanying the dot com bubble was theGlobe.com. The Globe was a social networking site that was the largest first day gain of any IPO (initial public offering), with stocks ranging from the initial 9$ per share up to a high of 97$ a share. The company has since went out of business in 2008 with their share prices averaging about 15 cents per share.
The Globe was not unlike any other publicly traded dot com business. With large speculation in the advancement of the internet and large cash flows from venture capital firms, each business was spending lots of money. So much money that virtually none of these companies would yield or even come close to turning a profit. The business plan of the Globe was to invest largely into publicizing the site, creating a large visitor audience, and wait for a solution as how to convert those visitors into revenue. The internet columnist from the New York Times said it very clearly in his example. His comparison to what these companies were doing at the time was like selling one hundred dollar bills for ten dollars a piece. The point is that this would of course bring in a large audience, but it would not have a sustainable way to continue because there is no way to make money that way. Written out like that, it would seem that the entire plan was not very solid. The entire business model started without an end in mind. They should have been more cautious with their money because of this.
The investors at the time were all inthralled with the internet sector and dot com businesses because they were simply making record breaking gains in short periods of time (up to fourty points in one day). Larry Wachtel, a top financial analyst, says that though he was an old school investor who stuck to the fundamentals, he eventually became an investor himself. Why is this? He simply attributes greed as the driving force to as why all these investors who should have known better were funneling all of their money into the dot com businesses. The reason all of these companies were jumping up so high in price was due to speculation. Speculation was good for the dot com businesses because everyone expected large and fast advancement. The speculation for advancement was so good that even the most experienced investors would ignore vital stock statistics like the price earning ratio (P/E ratio).
I think investors today are more mindful of these types of bubbles, but there are instances where they continue to make the same mistakes. Internet companies such as Netflix and Amazon, which have given enormous returns in the past few years, but also had very high price earnings ratios. Just like clockwork each company had a giant slump within the past five years that have cost investors millions of dollars.
I want to stress that this is all in hindsight. Investing is practically gambling, in that the bigger the risk, the better the return. Investors looking for big profits are tempted greatly to invest in new technologies that are not proven. After these companies/sectors have proven that they are good business models and can yield high profits in the future, the jig is up. There is no more money to make investing in proven industries, but it is just the opposite with unproven ones. There will no doubt be another technology bubble because in order to make money in the technology world, companies have to push the envelope and explore new and advanced ground.
The dot com bubble was good and bad for the internet business. A lot of internet companies today have a better foundation in their business plans. They have improving advertising schemes that actually do yield profits (Google, Facebook, etc.). Some companies had good structures already, but lost much of their investment due to the lack of faith in the internet sector. I believe that these better business models and growing faith have created better sites for the viewer, more sustainable business for the owners/employees. This translate to a better economic standing for the sector overall.
Some see a comparative situation between the dot com bubble of the early 2000’s with the mobile application market today. There is no way to tell if there is going to be a bubble in the future, but it is almost safe to say that there hasn’t been one already. Existing companies and start-ups alike are spending lots of money into the development of mobile applications. This is to gain exposure, create company awareness and gain profits through advertising and the actual purchase price of the app. I do see potential for a bubble to happen. The sectors are very similar in that these companies have lots of money invested in order to gain visitors. I do not see how there is as much opportunity to yield great profits compared to the amount of money going into the development. The mobile app businesses are correcting themselves against the mistakes that eventually lead to the demise of the dot com companies. The business plans seem much better as advertising and purchase prices are a good source of cash flow. This can only go so far though. I think that if venture capital continues to pour much more investment into these companies, investors will follow and the end result will in no doubt be the newest technology bubble.
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