What is ‘Bubble Company’
A bubble company is one whose valuation greatly exceeds that suggested by its fundamentals. The first well-documented bubble company was the South Sea Company, which caused the South Sea Bubble in 1720. A bubble company arises when speculators continuously buy up the stock in expectation of increased future earnings. However, bubble company shares often become worthless once the speculative bubble bursts.
BREAKING DOWN ‘Bubble Company’
One common characteristic of a bubble company is scandal. For example, during the dotcom bubble many internet-based firms traded at high multiples under the expectation of generating high levels of future growth. When earnings did not meet analysts’ expectations, many firms began to cook the books in order to manipulate their bottom lines. Once the internet bubble burst, the individual bubble companies either went bankrupt or experienced massive drops in their share prices.
Examples of Bubble Companies from Dotcom Bust
- Broadcast.com was found ed as AudioNet, an internet radio company founded in September 1995 by Christopher Jaeb. Todd Wagner and Mark Cuban later led the organization and eventually sold it to Yahoo on April 1, 1999 for $5.7 billion. Jaeb netted a major windfall in the wake of Broadcast.com’s massive sale, and in 2003, moved to Hawaii with his family. Wagner became an instant billionaire after the sale of Broadcast.com to Yahoo. Cuban also became an instant billionaire and now owns the Dallas Mavericks, Landmark Theatres, and Magnolia Pictures and regularly appears on the TV show Shark Tank as one of the titular sharks.
Geocities.com was webhosting service responsible for many of the strange, poorly designed sites that once proliferated the internet. Founded by David Bohnett and John Rezner in 1994, it went public in 1998 and was acquired by Yahoo in 1999. After GeoCities’ IPO in 1998 and acquisition by Yahoo in 1999, Bohnett made about $300 million. Since then, he’s been active through his charitable foundation, the David Bohnett Foundation and invests in new companies through his VC fund Baroda Ventures. Rezner netted $100 million after the sale of GeoCities. He currently sits on the board of directors of Acesis, a web-based platform for healthcare quality improvement and compliance documentation.
theGlobe.com was an early social networking site founded in 1994 by Stephan Paternot and Todd Krizelman. It went public on November 13, 1998 and posted the largest first-day gain of any IPO to date, closing up 606 percent from its starting price. In 2001, the stock plummeted from $97 a share to under 10 cents. Paternot helped found the company while still in college and moved to New York City to build the business. He left theglobe.com in 2000 and took some time off before starting a seed capital fund in 2002. Despite the skyrocketing first-day stock price of Paternot’s and Krizelman’s shares in theGlobe, within two years, the stock had tanked. Krizelman reports that he was fortunate enough to put some of his previously held wealth into other people’s companies, allowing him to weather the impact of theGlobe’s collapse.