The Dotcom Bubble Crash Was 20 Years Ago Today—Could it Happen Again?

Twenty years ago today, the dotcom bubble officially burst, ending a period of rampant hype and investment into technology stocks with a bang, and many whimpers.

In the mid-to-late 1990s, as access to the World Wide Web became more common around the world, all eyes turned to internet-based companies as the future of commerce, leading to excessive market speculation, reckless "fad" investments and an intense focus on marketing over substance.

Loose wallets and the desire to grow startups extremely fast helped to fuel the boom, pushing the Nasdaq to an all-time high of 5132.52 on March 10, 2000.

But the good times were not to last. By October 2002 the market had lost more than 75 percent of its value.

Dotcom businesses once listed as potential cash cows, like, Kozmo or eToys, imploded. Others from the era, notably Amazon and eBay, managed to cling on.

In 2020, the tech space is burgeoning, but crowded. There is little doubt the web is central to modern life, but could another major crash ever happen?

Experts told Newsweek the world is a very different place than it was in the late 90s, and the well-established tech firms are unlikely to face the same pitfalls as their digital ancestors.

Yet while top companies are not expected to tumble out of existence overnight, those without a solid financial footing—and a real reason to exist—could easily find themselves in trouble.

"The dotcom recession was caused by irrational exuberance," J.P. Gownder, vice president and principal analyst at U.S. market research company Forrester, told Newsweek.

"[It was] a bubble that took a real, transformational phenomenon—the internet—and compressed its potential for economic value into an unrealistic time frame—a couple of years.

"Many of today's technology firms have attained a level of maturity that almost no dotcom companies had: Microsoft and Amazon have huge cloud computing businesses, which the rest of the business world runs on. Facebook and Google have consumer networking and search."

Gownder said the top tech firms' business models are not as prone to bubbles as they are "based in reality" but warned that doesn't mean they are "impervious to the broader economy."

That economy may not be as susceptible to bursting in spectacular fashion as seen in the past, but this week it was made clear that it can certainly take a punch.

The 20 year anniversary of the dotcom bubble implosion this week came as the U.S. stock market suffered one of its biggest plunges since the 2008 financial crash, albeit for very different reasons. CNBC reported the top five tech giants lost more than $320 billion of value as a result.

Fears around the ongoing novel coronavirus outbreak have helped to fuel the downturn, as tech industry staffers are now being told to work from home to limit the spread of the disease.

Last month, Goldman Sachs analysts said in a financial note that the S&P 500 index concentration in the top tech companies—Facebook, Amazon, Apple, Microsoft, and Alphabet— was the greatest it has been in 20 years. That was a level not seen since 2000, Markets Insider reported.

"Yes, there are still new players coming into the scene with inflated valuations, lately we've seen that with artificial intelligence and fintech," technology industry analyst Joe McKendrick told Newsweek. "But tech companies are much more resilient than they were 20 years ago."

The meteoric rise in the value of cryptocurrencies in 2017 provides a more recent example of how all bubbles eventually burst. During that year, the value of digital money Bitcoin spiked from below $1,000 to nearly $20,000 in just 12 months, before eventually crashing amid a mass sell-off.

The mania surrounding crypto was palpable that year—with celebrities endorsing projects and initial coin offerings teasing riches for early investors, before fizzling into thin air. Still, despite similarities between the events, there were some key differences, technology analysts said.

"The dotcom bust of 2000-2001 was a unique event that was accompanied, coincidentally, with the aftermath of the build-up to Y2K," McKendrick explained to Newsweek.

"In the late 1990s, most of the leading IT infrastructure companies were seeing growth on two fronts, the scramble to fix legacy systems to be able to handle the date change as well as providing the demand for resources for the new e-commerce era," he continued.

Turning to modern companies, he added: "They operate in the cloud and have been moving their customers in this direction as well. This enables greater economies of scale for expansion, and less pain when there's a need to scale back. There's less reliance on hardware sales.

"The [most popular] products these days—analytics tools, AI, collaboration—can easily again be re-positioned. Plus, security solutions remain front and center, and is an area not likely to see dramatic cutbacks in the event of a downturn. Lastly, it's not likely the industry will face another double-barreled downturn that is also accompanied by the hangover from a date change."

Despite not betting in favor of another bubble and crash, Gownder told Newsweek that not every technology firm in the modern era should be considered safe from future financial risk.

"The real dotcom-like companies are those that have never established a cash-flow positive business model," the Forrester analyst elaborated.

"Uber has transformed transportation across the globe, but the company has never made money; the [COVID-19] coronavirus is a huge threat to its business model.

"WeWork built itself on a vision and a promise, and not only hasn't made money, but committed itself to huge leases with building owners. Technology firms that are leveraging the promise of the future without current gains are most likely to implode in any sort of economic downturn."

New York Stock Exchange
People walk past the New York Stock Exchange (NYSE) on February 12, 2020 in New York City. Spencer Platt/Getty