Dot-Com Crash

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  • hai im a newcomer your slide very very helping meeeee
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  • Part of the reason for this crash was there was so much out there that was unknown. It was like any guy with credit card machines for small business thought that he had a legit business just because he owned a dot com. We know now that is not the case. Business models still apply.
    http://www.creditcardterminalsupplies.com
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  • Dot-Com Crash

    1. 1. Mohamed Ragab Mostafa Mazen DOT-COM CRASH
    2. 2. Agenda <ul><li>Financial Bubbles </li></ul><ul><li>Growth of the Bubble </li></ul><ul><li>The Peak </li></ul><ul><li>Causes of the Collapse </li></ul><ul><li>After the Crash </li></ul><ul><li>Top Failures </li></ul><ul><li>Bubble 2.0 </li></ul><ul><li>Conclusion </li></ul>
    3. 3. Background On Financial Bubbles <ul><li>A boom in the stock prices of a certain industry followed by a sudden drop. </li></ul><ul><li>Investors put high bids on a stock driving the stock’s price above the fair value of its actual worth. </li></ul><ul><li>Bubble bursts and stock prices fall to their true values causing a drop in the total value of the market. </li></ul>
    4. 4. Start of the Boom <ul><li>Rise in the number of internet users was accompanied by the set-up of hundreds of Internet-based companies known as dot-coms </li></ul><ul><li>Speculators suggested that this was the start of a “new economy” based on e-commerce. </li></ul><ul><li>In 1999 there were 457 IPOs in the U.S. stock market, most of which were internet related. </li></ul><ul><li>More than one hundred stocks doubled in price on the first day of trading. </li></ul>
    5. 5. Market Data Variable Type of Stocks Mean Median Market Value of Equity (million USD) Internet 4,495 1,323 Non-internet 5,111 599 Stock Price (USD) Internet 65.96 46.38 Non-internet 33.97 22.00 Median Daily Volume Internet 78,558 16,419 Non-internet 24,988 2,321 Median Shares-Turnover Internet 1.48% 1.25% Non-internet 0.78% 0.34% Average Daily Return Internet 0.67% 0.60% Non-internet 0.19% 0.05%
    6. 6. REASONS BEHIND THE GROWTH OF THE BUBBLE
    7. 7. Retailer-Dominated Market (Source: Ofek & Richardson) Institutional Holdings Type of Stocks Mean Median Internet Stocks 31.33% 25.92%
    8. 8. Retailer-Dominated Market <ul><li>Majority of investors during the dot-com boom were retailers and not institutions. </li></ul><ul><li>Rise of Internet stocks to unrealistic values was due to the buying of overly optimistic retail investors rather than the more wise and experienced institutions. </li></ul>
    9. 9. Rapid Growth Strategies <ul><li>“ Get Big Fast” Strategies </li></ul><ul><li>Dot-coms sustained net loss to establish market share through network effect </li></ul><ul><li>Planned to charge for their services later </li></ul><ul><li>Depended on venture capital and IPOs </li></ul>
    10. 10. Early Successes <ul><li>Few founders made enormous profits when their companies were sold at an early stage of the bubble. </li></ul><ul><ul><li>Excite was purchased by @HomeNetworks for 6.7 billion USD </li></ul></ul><ul><li>Early successes made investors more eager in invest in dot-coms </li></ul>
    11. 11. The Peak <ul><li>March 10, 2000 </li></ul><ul><ul><li>NASDAQ reached 5132.52 </li></ul></ul>
    12. 12. CAUSES OF THE COLLAPSE
    13. 13. Lockup Period Expiration <ul><li>Lockup Period : a predetermined amount of time following an IPO during which employees of the underwriter company are not allowed to sell. </li></ul><ul><li>When the lockup period expires, new potential sellers enter the market </li></ul><ul><ul><li>New Shares </li></ul></ul><ul><ul><li>New Expectations </li></ul></ul>
    14. 14. Lockup Period Expiration
    15. 15. Drop in IT Spending After Y2K <ul><li>Significant growth in the IT industry was due to the preparations for the Y2K switchover. </li></ul><ul><li>There was great concern that systems will collapse if they confuse year 2000 with year 1900. </li></ul><ul><li>After millennium’s New Year passed, spending in IT declined. </li></ul>
    16. 16. Identical and Unrealistic Business Plans <ul><li>Similar business plans of growing at a high rate to monopolize the markets through network effects. </li></ul><ul><li>One company at most succeeded, the rest failed. </li></ul><ul><li>Dot-coms had exhausted all the capital they received from venture capitalists and from their IPOs and were still failing to generate profit. </li></ul>
    17. 17. The Crash <ul><li>Monday March 13 th : Large number of sell orders for IT stocks were processed simultaneously </li></ul><ul><li>Caused a drop in the NASDAQ from 5038 to 4879 in one day. </li></ul><ul><li>Triggered a chain reaction of selling </li></ul><ul><li>In 3 days the NASDAQ lost 9% falling to 4580 </li></ul>
    18. 18. The Crash
    19. 19. The Crash <ul><li>NASDAQ eventually lost 78% as it fell from to 1114 in October 2002. </li></ul><ul><li>Between March 2000 and October 2002, the Dot-Com Crash had removed $5 trillion in market value. </li></ul>
    20. 20. After the Crash <ul><li>Dot-coms </li></ul><ul><ul><li>Filed for bankruptcy </li></ul></ul><ul><ul><li>Liquidated </li></ul></ul><ul><ul><li>Acquired </li></ul></ul><ul><li>Several companies were charged of accounting frauds and misuse of investors’ capital. </li></ul><ul><li>Few dot-coms survived the crisis such as eBay, Amazon.com and Yahoo! </li></ul><ul><li>Relation to Housing Bubble </li></ul><ul><ul><li>“ Once stocks fell, real estate became the primary outlet for the speculative frenzy that the stock market had unleashed.” – Robert Shiller </li></ul></ul>
    21. 21. Top Dot-Bombs <ul><li>Webvan </li></ul><ul><ul><li>Online Super Market </li></ul></ul><ul><ul><li>30 minute window, night deliveries </li></ul></ul><ul><ul><li>No industry background </li></ul></ul><ul><ul><li>Invested on infrastructure, exceeding sales growth </li></ul></ul><ul><ul><li>Bankrupt in 2001 </li></ul></ul><ul><li>Pets.com </li></ul><ul><ul><li>Accessories and pet supplies </li></ul></ul><ul><ul><li>Invested in advertising, warehouses, infrastructure </li></ul></ul><ul><ul><li>Needed 4-5 years to break even </li></ul></ul><ul><ul><li>From 1998, liquidated in 2000 </li></ul></ul>
    22. 22. Bubble 2.0 <ul><li>Web 2.0 </li></ul><ul><ul><li>Stresses on collaboration among users and the creation of internet-based communities </li></ul></ul><ul><ul><li>Content is supplied by the users themselves </li></ul></ul><ul><li>The recent purchase of MySpace by NewsCorp and YouTube by Google sparked the web 2.0 investment boom. </li></ul><ul><li>Some analysts believe a second dot-com bubble, Bubble 2.0 , is in the making. </li></ul>
    23. 23. Bubble 2.0 <ul><li>Evidence For </li></ul><ul><li>High stock prices. </li></ul><ul><ul><li>Google traded at 700 USD </li></ul></ul><ul><li>High P/E ratio of the tech companies’ stocks. </li></ul><ul><ul><li>Industry average of an overvalued P/E ratio is 25 </li></ul></ul><ul><ul><ul><li>Google : 55.17 </li></ul></ul></ul><ul><ul><ul><li>Apple : 48 </li></ul></ul></ul><ul><ul><ul><li>Yahoo! : 55.96. </li></ul></ul></ul>
    24. 24. Bubble 2.0 <ul><li>Evidence Against </li></ul><ul><li>Internet infrastructure is more robust and mature </li></ul><ul><li>Cost of these startups in comparison to the earlier dot-coms is minimal. </li></ul><ul><li>Web 2.0 is user driven, a lot easier to build a client base </li></ul><ul><li>Businesses have more sound business plans, </li></ul><ul><ul><li>Maybe they still do not have revenue, but they have product, some customers, and adoption. - Andrew McAfee, Associate professor at Harvard University </li></ul></ul>
    25. 25. Conclusion <ul><li>Successful investments should be based on deep market analysis and solid business plans with experienced managers at the helm. </li></ul><ul><li>Investments should not rely only on: </li></ul><ul><ul><li>new technology </li></ul></ul><ul><ul><li>investor’s enthusiasm </li></ul></ul><ul><ul><li>rapid growth </li></ul></ul><ul><ul><li>first mover’s advantage </li></ul></ul><ul><ul><li>copying other successes </li></ul></ul>
    26. 26. Conclusion <ul><li>Warren Buffet: </li></ul><ul><ul><li>“ After a heady experience of that kind </li></ul></ul><ul><ul><li>( the high stock returns ) normally sensible people drift into behavior like that of Cinderella at the ball. They know that overstaying the festivities will eventually bring on pumpkins and mice” </li></ul></ul>
    27. 27. References <ul><li>Lieberman, Marvin B.. &quot;Did First-Mover Advantage.&quot; Jstor 17 Oct 2002 5 Apr 2008 </li></ul><ul><li>&quot;Dot-com bubble.&quot; Wikipedia, The Free Encyclopedia . 9 Apr 2008, 18:02 UTC. Wikimedia Foundation, Inc. 14 Apr 2008 <http://en.wikipedia.org/w/index.php?title=Dot-com_bubble&oldid=204500089>. </li></ul><ul><li>http://www.computerworld.com/action/article.do?command=viewArticleBasic&articleId=9013700 </li></ul><ul><li>“ I Told You So.” BBC News . 3 Apr 2008. <http://news.bbc.co.uk/2/hi/business/1217716.stm> </li></ul><ul><li>&quot;Bubble 2.0.&quot; Wikipedia, The Free Encyclopedia . 9 Apr 2008, 18:02 UTC. Wikimedia Foundation, Inc. 14 Apr 2008 < >. </li></ul><ul><li>&quot;Webvan.&quot; Wikipedia, The Free Encyclopedia . 9 Apr 2008, 18:02 UTC. Wikimedia Foundation, Inc. 14 Apr 2008 < http://en.wikipedia.org/wiki/Webvan>. </li></ul><ul><li>&quot;Pet.com.&quot; Wikipedia, The Free Encyclopedia . 9 Apr 2008, 18:02 UTC. Wikimedia Foundation, Inc. 14 Apr 2008 <http://en.wikipedia.org/wiki/Pets.com>. </li></ul><ul><li>Ofek, Eli and Matthew Richardson. &quot;DotCom Mania: The Rise and Fall of Internet Stock Prices.&quot; The Journal of Finance June 2003. 5 Apr 2008. <http://www.jstor.org/stable/3094574> </li></ul><ul><li>Ofek, Eli and Matthew Richardson. &quot;DotCom Mania: The Rise and Fall of Internet Stock Prices.&quot; The Journal of Finance June 2003. 5 Apr 2008. <http://www.jstor.org/stable/3094574> </li></ul><ul><li>Allis, Ryan P. “The Causes of the Dot Com Crash.”5Apr 2008. <http://www.zeromillion.com/econ/dot-com-crash.html> </li></ul><ul><li>German, Kent. “Top 10 dot-com flops” CNET . 5 Apr 2008. < http://www.cnet.com/4520-11136_1-6278387-1.html> </li></ul><ul><li>http://www.investopedia.com/features/crashes/crashes8.asp </li></ul><ul><li>Waters, Richard. “Bubble 2.0?” Financial Times . 30 Apr 2007. 5 Apr 2008. < http://us.ft.com/ftgateway/superpage.ft?news_id=fto043020071500454151&page=2> </li></ul>
    28. 28. THANK YOU <ul><li>Questions? </li></ul>

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