Bubble Company

A company 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.

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.

Investment dictionary. . 2012.

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