Analysts struggled to properly value dot-com companies during the late 1990s bubble. Many relied on dubious metrics like multiplying a company's user growth to increase its valuation, which had no real logic. Some companies were valued based only on their domain name if it contained trendy terms like "e-commerce". The lack of proven business models and profitability led to speculative frenzies that drove prices far higher than actual company fundamentals justified. Many investors participated not because they expected companies to be profitable, but because they wanted to profit from rapidly rising share prices before the inevitable bursting of the bubble.

1. The dot.com bubble
How was the dot.com market valued?
Rory Cellan Jones
‘Nobody knew how to value a dot-com. Analysts began to come up with all sorts of strange
and dubious ways of valuing these companies by the growth in users.
You might double or treble the number of your users and therefore you would be worth two or
three times as much as you had been a few weeks back.
It had no real logic behind it but to those involved in it, it did seem to be a method behind the
madness.’
James Montier
‘You ended up valuing equities on the basis of eyeballs and clicks, how many times people
looked at a website, as if this was any use as an investment valuation metric.
But it’s all about justifying the price, not actually analysing the price.’
Mark Goodson
‘You had new companies starting up with no history, you had nothing to research.
It was the name, that was the research.
If someone gave it a whizzo name, that was linked to the economy you know, something
beginning with an “e”, or something with the word ‘net’ in it, and it was: oh, that must be good,
you know, it’s an internet stock, pwoar, up it went.
It was as crazy as that.
Everyone did the same, you know, technology was the market.’
Barry Lake
‘When you have put money, on a tiny amount in and it suddenly turned into 380,000, it’s
extremely exciting because you start to think: wow, this is cool.
You know, okay guys, we’re having new cars next year.’
Narrator
Greed and speculation led to the development of a further type of bubble – a so-called
‘rational’ bubble.
James Montier
‘They’re cynical bubbles. People know they are not going to last, but they want to participate
whilst the times are good, believing they can get out before it all ends.’
Mariana
‘What the investors are really interested in is not so much that the company necessarily
makes a profit, but that you have, if you want, all these expectations around that company, so
the stock price goes up, and then the investors actually can just quickly get out and they
made a buck.
And that happened both in railways in the 1840s, as well as in biotech and dot-com.’