What the Bubble Taught Us About Tech

The Nasdaq 100 peaked on March 10, 2000. Over the next two and a half years, it lost 78% of its value, and many of the Internet companies that survived still sell below their all-time highs. In this remembrance, we ask what we've learned over the past 10 years.

In the battle of the bubbles, the dot-com disaster may have been less devastating than the recent financial fiasco and housing hullabaloo, but it still destroyed about $5 trillion in stock market value.

Too many of us spent precious dollars chasing the next eMeringue.

Bad enough to write a book about
So ugly was the bust that the co-founders of one of Wired's notable dot-com survivors -- our very own David and Tom Gardner -- felt compelled to publicly confess their mistakes in their 2002 book, The Motley Fool's What to Do With Your Money Now. Among them: paying too much for growth, and failing to give profits due respect.

Tom and David weren't the only ones. Consider the poor souls who bought shares of these dot-com dynamos at the height of the bubble. They've yet to break even:

Source: Yahoo! Finance.
* Returns calculated through closing on May 11, 2010.

For the most part, Fools haven't warmed to these stocks. They have good reason not to in the case of Ballard Power, which is still losing money, and despite being a high-revenue-growth tech company, has never found a formula to produce strong and expanding gross margins.

Palm wasn't in much better shape when it accepted a $1.2 billion bailout from Hewlett-Packard (NYSE: HPQ) recently, and with the stock stuck near its $5.70 per share buyout price, there's little room for arbitrage here. HP, meanwhile, looks like a decent play after reporting expectations-busting earnings last night.

Internet Capital Group may be the most interesting of this list. Back in 1999, the company was to be the venture capital firm for the dot-com era, on par with CMGI and Bill Gross' idealab. (No, not PIMCO Bill Gross, this Bill Gross.) Internet Capital would reach a $60 billion valuation before collapsing, yet today boasts an interesting portfolio that includes shares of Blackboard (Nasdaq: BBBB), a pick of both our Motley Fool Hidden Gems and Motley Fool Stock Advisor services.

When sock puppets were all the rage
Too many other dot-com stocks proved unsustainable. None of these one-time wonders exist today:

Pets.com. The sock puppet dot-com. Made famous in a series of clever TV commercials, the mike-clad pitch pooch never was able to convince pet owners they'd do better by ordering food and supplies on the Web. Our own Jeff Fischer put the flameout in perspective in this November 2000 column:

Pets.com raised millions with nary a sustainable advantage to its name (it was not a Rule Breaker), and the venture capitalists knew that most of the money would be blown on marketing. Then, Pets.com was able to go public without a penny of value creation, let alone meaningful experience, under its belt.

Webvan. The solution-to-a-problem-that-didn't-exist dot-com. Consumers never showed signs of preferring grocery delivery to shopping at their local store, yet Webvan was still able to raise $375 million in a 1999 IPO. The company would be out of business two years later, denting the reputation of former Accenture boss George Shaheen.

DrKoop.com. The buy-a-brand-name-and-see-who-shows-up dot-com. Founded in 1998 with $6 million in financing and rights to the name of former U.S. Surgeon General Dr. C. Everett Koop, this site was supposed to draw advertisers who would pay to connect to millions of health-conscious users. Turns out that was (ahem) optimistic thinking. Today, the company is a shell of its former self, embedded within the HealthCentral Network.

Kozmo.com. The great-idea-that-never-IPO'd dot-com. Kozmo.com promised free delivery of, well, anything. Sort of like your own personal fido-cum-pizza delivery boy, except the service would fetch everything from DVDs to snacks. Problem was, Kozmo.com treated pricing as an afterthought. You know what happened next.

Morons, crooks, and ice statues -- oh my!
Then there are the not-quite dot-coms that nevertheless left their mark by trying to profit from the hysteria, at times illegally, and often unethically. You know the names: Enron, WorldCom, and Tyco.

Of the three, Tyco has reemerged as a multibillion-dollar conglomerate. But under the reign of former CEO Dennis Kozlowski, Tyco was a symbol of dot-com excess. The Koz's company-funded toga parties, resplendent with vodka-whizzing ice statues, are first-ballot entries in Corporate America's Hall of Shame.

Enron and WorldCom have more sinister stories to tell. In each case, phantom profits led investors astray as executives cashed in. Former CEOs Jeff Skilling and Bernie Ebbers have since been fitted for orange jumpsuits, and neither is likely to breathe free air soon.

The dark before the dawn
We can learn a lot of from these fraudsters and flimsy business models, lessons that apply to this day, 10 years after the "Pop Heard 'Round the Digital World." Here are three:

1. It's never, ever "different this time." Sock puppets don't change the rules of economics any more than Wile E. Coyote gets to change the laws of physics by strapping on a ragged pair of cartoon wings. This is why you avoid stocks such as Synutra (Nasdaq: SYUT), which not only gets a one-star rating from the Fools in our Motley Fool CAPS database, but also has six times more debt than equity, and which last managed a positive return on capital in 2008.
2. Owners usually beat flippers. Businesses run by owners with a lot to lose tend to do better than opportunistic entrepreneurs who hope to seize the moment and cash out. Don't believe me? Check the list of the world's billionaires sometime. You'll find long-term winners such as Oracle's (Nasdaq: ORCL) Larry Ellison, who still owns more than 23% of the business he co-founded in 1977.
3. There's no substitute for a competitive advantage. Flippers fail because they build for the moment rather than for longevity and need. Companies that sell in-demand products and services are the ones that generate healthy margins, profits, and cash flow -- the fire that fuels stock returns.

Had enough cold coffee? I don't blame you. Here's some good news: In the very dark days of May 2002, Netflix went public, introducing its disruptive business model to common equity investors. CEO and founder Reed Hastings and his team have created staggering amounts of wealth in the years since.

Netflix is why I'm writing this remembrance. You see, for as much damage as the dot-com bubble caused, and for as much trouble as the recession could still be causing, there's always going to be a Netflix out there for you to invest in, especially when it comes to the ever-shifting sands of tech.

My colleagues and I at Motley Fool Rule Breakers have some ideas for where to start your hunt for the next Netflix. Just click here to accept a 30-day free trial to the service. There's absolutely no obligation to subscribe.

Bubbles are always fun till they pop, leaving you covered in goo. One decade ago, a lot of us got covered. But that was then, and this is now. We're smarter, more Foolish, and have just as many ways to profit.

Eat that, Enron.

This article was originally published on March 10, 2010. It has been updated.

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Fool contributor Tim Beyers is a member of the Rule Breakers stock-picking team. He had stock and options positions in Apple at the time of publication. Blackboard and Netflix are Motley Fool Stock Advisor selections. Blackboard is also a Motley Fool Hidden Gems recommendation. Accenture is a Motley Fool Inside Value pick. The Fool owns shares of and has written puts on Oracle. Its disclosure policy could use a nap. 'Night.