Tech Bubble

DEFINITION of 'Tech Bubble'

A pronounced and unsustainable market rise attributed to increased speculation in technology stocks. A tech bubble is highlighted by rapid share price growth and high valuations based on standard metrics like price/earnings ratio or price/sales.

The technology stocks involved in a bubble may be confined to a particular industry (such as internet software or fuel cells), or cover the entire technology sector as a whole, depending on the strength and depth of investor demand. At the peak of a bubble, many fledging tech companies will seek to go public through initial public offerings (IPOs) in an attempt to capitalize on heightened investor demand.

BREAKING DOWN 'Tech Bubble'

During the formation of a tech bubble, investors begin to collectively think that there's a huge opportunity to be had, or that it's a "special time" in the markets. This leads them to purchase stocks at prices that normally wouldn't even be considered. New metrics are often used to justify these stock prices, but fundamentals as a whole tend to take a backseat to rosy forecasts and blind speculation.

A bubble may end with a crash, or may simply deflate as investors slowly lose interest and sales pressure pushes stock valuations back to normalized levels.

The most recent (and biggest in terms of scope) tech bubble occurred in the late 1990s and ended rather abruptly in early 2000. The causes for its downfall are numerous, but evidence of this decline first appeared within the big telecom hardware providers, who at the time were supplying most of the tech startups and dotcoms with servers and networking hardware. Once revenue at the telecoms fell off dramatically, it rippled through their respective end markets and eventually, the entire economy slipped into recession in 2001.

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