Dot-Com Crash

Mohamed Ragab Mostafa Mazen DOT-COM CRASH

Agenda
Financial Bubbles
Growth of the Bubble
The Peak
Causes of the Collapse
After the Crash
Top Failures
Bubble 2.0
Conclusion

Background On Financial Bubbles
A boom in the stock prices of a certain industry followed by a sudden drop.
Investors put high bids on a stock driving the stock’s price above the fair value of its actual worth.
Bubble bursts and stock prices fall to their true values causing a drop in the total value of the market.

Start of the Boom
Rise in the number of internet users was accompanied by the set-up of hundreds of Internet-based companies known as dot-coms
Speculators suggested that this was the start of a “new economy” based on e-commerce.
In 1999 there were 457 IPOs in the U.S. stock market, most of which were internet related.
More than one hundred stocks doubled in price on the first day of trading.

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%

REASONS BEHIND THE GROWTH OF THE BUBBLE

Retailer-Dominated Market (Source: Ofek & Richardson) Institutional Holdings Type of Stocks Mean Median Internet Stocks 31.33% 25.92%

Retailer-Dominated Market
Majority of investors during the dot-com boom were retailers and not institutions.
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.

Rapid Growth Strategies
“ Get Big Fast” Strategies
Dot-coms sustained net loss to establish market share through network effect
Planned to charge for their services later
Depended on venture capital and IPOs

Early Successes
Few founders made enormous profits when their companies were sold at an early stage of the bubble.
Excite was purchased by @HomeNetworks for 6.7 billion USD
Early successes made investors more eager in invest in dot-coms

The Peak
March 10, 2000
NASDAQ reached 5132.52

CAUSES OF THE COLLAPSE

Lockup Period Expiration
Lockup Period : a predetermined amount of time following an IPO during which employees of the underwriter company are not allowed to sell.
When the lockup period expires, new potential sellers enter the market
New Shares
New Expectations

Lockup Period Expiration

Drop in IT Spending After Y2K
Significant growth in the IT industry was due to the preparations for the Y2K switchover.
There was great concern that systems will collapse if they confuse year 2000 with year 1900.
After millennium’s New Year passed, spending in IT declined.

Identical and Unrealistic Business Plans
Similar business plans of growing at a high rate to monopolize the markets through network effects.
One company at most succeeded, the rest failed.
Dot-coms had exhausted all the capital they received from venture capitalists and from their IPOs and were still failing to generate profit.

The Crash
Monday March 13 th : Large number of sell orders for IT stocks were processed simultaneously
Caused a drop in the NASDAQ from 5038 to 4879 in one day.
Triggered a chain reaction of selling
In 3 days the NASDAQ lost 9% falling to 4580

The Crash

The Crash
NASDAQ eventually lost 78% as it fell from to 1114 in October 2002.
Between March 2000 and October 2002, the Dot-Com Crash had removed $5 trillion in market value.

After the Crash
Dot-coms
Filed for bankruptcy
Liquidated
Acquired
Several companies were charged of accounting frauds and misuse of investors’ capital.
Few dot-coms survived the crisis such as eBay, Amazon.com and Yahoo!
Relation to Housing Bubble
“ Once stocks fell, real estate became the primary outlet for the speculative frenzy that the stock market had unleashed.” – Robert Shiller

Top Dot-Bombs
Webvan
Online Super Market
30 minute window, night deliveries
No industry background
Invested on infrastructure, exceeding sales growth
Bankrupt in 2001
Pets.com
Accessories and pet supplies
Invested in advertising, warehouses, infrastructure
Needed 4-5 years to break even
From 1998, liquidated in 2000

Bubble 2.0
Web 2.0
Stresses on collaboration among users and the creation of internet-based communities
Content is supplied by the users themselves
The recent purchase of MySpace by NewsCorp and YouTube by Google sparked the web 2.0 investment boom.
Some analysts believe a second dot-com bubble, Bubble 2.0 , is in the making.

Bubble 2.0
Evidence For
High stock prices.
Google traded at 700 USD
High P/E ratio of the tech companies’ stocks.
Industry average of an overvalued P/E ratio is 25
Google : 55.17
Apple : 48
Yahoo! : 55.96.

Bubble 2.0
Evidence Against
Internet infrastructure is more robust and mature
Cost of these startups in comparison to the earlier dot-coms is minimal.
Web 2.0 is user driven, a lot easier to build a client base
Businesses have more sound business plans,
Maybe they still do not have revenue, but they have product, some customers, and adoption. - Andrew McAfee, Associate professor at Harvard University

Conclusion
Successful investments should be based on deep market analysis and solid business plans with experienced managers at the helm.
Investments should not rely only on:
new technology
investor’s enthusiasm
rapid growth
first mover’s advantage
copying other successes

Conclusion
Warren Buffet:
“ After a heady experience of that kind
( 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”

References
Lieberman, Marvin B.. "Did First-Mover Advantage." Jstor 17 Oct 2002 5 Apr 2008
"Dot-com bubble." 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>.
http://www.computerworld.com/action/article.do?command=viewArticleBasic&articleId=9013700
“ I Told You So.” BBC News . 3 Apr 2008. <http://news.bbc.co.uk/2/hi/business/1217716.stm>
"Bubble 2.0." Wikipedia, The Free Encyclopedia . 9 Apr 2008, 18:02 UTC. Wikimedia Foundation, Inc. 14 Apr 2008 < >.
"Webvan." Wikipedia, The Free Encyclopedia . 9 Apr 2008, 18:02 UTC. Wikimedia Foundation, Inc. 14 Apr 2008 < http://en.wikipedia.org/wiki/Webvan>.
"Pet.com." Wikipedia, The Free Encyclopedia . 9 Apr 2008, 18:02 UTC. Wikimedia Foundation, Inc. 14 Apr 2008 <http://en.wikipedia.org/wiki/Pets.com>.
Ofek, Eli and Matthew Richardson. "DotCom Mania: The Rise and Fall of Internet Stock Prices." The Journal of Finance June 2003. 5 Apr 2008. <http://www.jstor.org/stable/3094574>
Ofek, Eli and Matthew Richardson. "DotCom Mania: The Rise and Fall of Internet Stock Prices." The Journal of Finance June 2003. 5 Apr 2008. <http://www.jstor.org/stable/3094574>
Allis, Ryan P. “The Causes of the Dot Com Crash.”5Apr 2008. <http://www.zeromillion.com/econ/dot-com-crash.html>
German, Kent. “Top 10 dot-com flops” CNET . 5 Apr 2008. < http://www.cnet.com/4520-11136_1-6278387-1.html>
http://www.investopedia.com/features/crashes/crashes8.asp
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>

THANK YOU
Questions?

Dot-Com Crash

by mragab on Apr 14, 2008

Accessibility

Categories

Tags

Upload Details

Usage Rights

2 Embeds 34

Statistics

Dot-Com Crash — Presentation Transcript

http://www.slideshare.net	32
http://mragab.blogspot.com	2