The fears of Dotcom Bubble 2.0

The dot-com bubble or Internet Bubble was a speculative bubble during the 1995–2000 with a climax in 2000 during which stock markets in industrialized nations saw their equity value rise rapidly from growth in the Internet sector and related fields.

The reason was a steady commercial growth of the Internet with the advent of the world wide web. This period was marked by founding (and, in many cases, spectacular failure) of a group of new Internet-based companies commonly referred to as dot-coms.

Companies were seeing their stock prices shoot up if they simply added an “e-” prefix to their name and/or a “.com” to the end and this was called by an author as “prefix investing“. (wikipedia)

The ET recently published a news item in which it mentioned that flipkart.com, the Rs. 70-crore online retailer of books and electronics is reportedly close to bagging a private equity investment at a valuation of $1 billion (about Rs. 4,500 crore). The news further says that in first six months of calendar 2011, private equity firms invested $108 million in nine e-commerce companies. The valuations in general are being tagged as Dotcom Bubble 2.0 in making.

The issue was first flagged in the Indian media Tehelka magazine, dated August 2, which termed it “nonsense accounting practices at some of these e-commerce firms”.

It works like this. Say, the cost price of a book for an e-commerce firm is Rs. 100. It offers it for sale for Rs. 120, but also offers a Rs. 30 discount, be it in the form of cash or a gift certificate. A customer buys the book at an effective price of Rs. 90. But XYZ does not record Rs. 90 as revenue and Rs. 10 as loss. It breaks it down into two entries. The first entry records Rs. 20 as revenue and Rs. 20 (Rs. 120-Rs. 100) as profit. The second entry records the Rs. 30 discount as an expense. But this is not expensed the same year. Instead, it is capitalised and written off over many years, thus inflating profits in the current year.

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