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Bubbles burst when pricing runs ahead
Pricing too far ahead
People are guessing how far forward to price a real market. When the guess runs too far ahead, the company bought at 50 times revenue turns out to belong at 15 times, or five times. Every market has gone through that cycle.
Dot-com versus AI
The dot-com era priced companies on metrics that weren't dollars, like hits to a website and numbers of web pages. The AI boom runs on revenue, profits, and growth in both that have never been seen before, from the leading AI labs to data center infrastructure and networking equipment, so the money flowing is real rather than speculative utilization.
The 2000 crash
The dot-com bust arrived in March and April of 2000. The leading companies lost 95% of their value in under six months, and the long tail of smaller companies went out of business, with people carrying Aeron chairs and computers out of the offices.
How much did the Nasdaq fall after 2000?
The Nasdaq Composite peaked at 5,048 on March 10, 2000. By October 2002 it had fallen about 78 percent, to roughly 1,114. The index did not close above its 2000 peak again until April 2015. Many individual dot-com stocks never recovered at all.
Why does a small change swing stock prices?
A company's price reflects the cash it is expected to produce in the future, discounted back to today. Fast growers get most of their value from years far ahead, so a small cut to expected growth or a rise in the discount rate removes a large share of the price. A company priced at 50 times revenue needs years of rapid growth just to justify that multiple. When expectations are revised downward, the multiple compresses even if the business keeps growing.
Why were Aeron chairs a dot-com symbol?
Herman Miller introduced the Aeron chair in 1994, and its mesh design and price, well above that of typical office chairs, made it a status item at startups. During the late 1990s boom, companies bought them by the hundreds. After the crash, liquidators sold them off at deep discounts. The chair is now in the permanent collection of the Museum of Modern Art.
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