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THE DOT (.) COM BUBBLE

THE DOT (.) COM BUBBLE. By: Michelle, Kan, Kenny, Varun. Thesis: The pricing o stocks does not Justify a company’s true value. (see after intro). Introduction: What is the Dot.Com Bubble.

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THE DOT (.) COM BUBBLE

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  1. THE DOT (.) COM BUBBLE By: Michelle, Kan, Kenny, Varun Thesis: The pricing o stocks does not Justify a company’s true value. (see after intro)

  2. Introduction: What is the Dot.Com Bubble • A bubble is a speculative period in which stocks prices rise dramatically in a short amount of time without fundamental news to prove the upward jump • The dot.com bubble (1995-2001) was a period when the Western world saw technology stocks soared to unbelievable new heights.

  3. Bubbles in history • There was a railway bubble around 1850. • Last bubble that popped was the dot.com bubble. There is also rumors about a China bubble and another dot.com called 2.0 • China bubble is the growth of Chinese firms like China Mobile; the share prices of these companies gained over 200% in 2007. • Bubble 2.0 is bubble of new technology companies like Google which gained over 300% in share price in 2 years. Also facebook is now valued at 10B(calculated by the MSFT deal.)

  4. More on Dot.coms • The companies during the dot.com are called the dotcoms • Companies include Nortel Networks (First CDN stock on NYSE), Cisco, Microsoft, Amazon.com and much more. The shares of these companies gained over 200% in 1999. • But DOES that really mean growth or was it all speculation? (from traders and speculators)

  5. What happened in the end? • After March 10,2001, the truth revealed it self as the shares of dotcoms were sinking. The NASDAQ composite dropped from intraday high of 5132.52 to merely 4000 in a week. After a year, it sank to 2500. • United States, along with Canada, went into a mild recession in 2001. The bears had beaten down the bull until late 2003. • Only 50% of companies survived…other got brought over or annouced bankruptcy.

  6. Historical NASDAQ prices low 1100 Peak at 5100

  7. Historical chart of NASDAQ

  8. Central Thesis • The pricing of stocks on the stock markets- such as TSX, NYSE, LSE- does not justify a company’s true values, especially in optimistic times. • This is because some technology companies went way out of control and the prices of these stocks did NOT reflect the fundamental data. I.E …..EPS, P/E ratio, PEG ratio, book value per share.

  9. First example of speculative growth. Nortel Network (NT on NYSE&TSX) • Known as Nortel telecom in the 1800s. Four years after the telephone was invented. • The first Canadian company to be listed on the NYSE • From 1995-2000, Nortel saw spectacular growth. It added 20 000 new jobs • Stock grew from merely 100 (adjusted scale) to 1200 (peaked at August 2000)

  10. Nortel in the end • Ended up facing 950 million dollar of charges on bed debts (could not keep up payments) • Write-down of 12.3 Billion on technology related investments • Had a operating loss of 1.5 Billion dollars. • Accounting fraud was found about Nortel’s financial statements. They were hiding almost millions of dollars for debts. • Stock hit a 10 year low in 2008 with stock price of 12.78 CAD on the TSX

  11. Impacts of Nortel and our thesis • The business model of Nortel was difficult to evaluate during the 1990s. • The speculative growth pushed up Nortel’s shares to new heights but fundamentals did not keep up. They were even hiding debts. • The company’s value did not reflect the price (which was way too high). When true data came out, the share price automatically went down • Nortel market cap (300 Billion) was 1/3 of the TSX in 2000. But dropped to (10 Billion) in 2002

  12. All time low base Growth+ positive MACD High vol.

  13. Nortel Network (NT) NYSE high Low Same low as 1983

  14. Second example: Cisco Systems Inc. (CSCO) • In 1995, they started making a new device called the “router” to link networks • It became well-know for their networking products. (new devices) • Many manufactures approached them. • Revenue raised from 1995-2000 • At the height of the dot.com bubble, CSCO was at 80 dollar/share with a market cap of 580 Billion (That’s big as a stock exchange)

  15. Downfall of Cisco • Cisco could not give up the 60% growth rate even though they saw high risks • Management team was too mercenary and promoted downfall. (ordering numerous equipments) • After the burst of dot.com bubble, they could not sell the extra inventory. Wrote down 2.5 Billion • Stocks dropped to a low of 14 dollars in 2002.

  16. Impacts of CSCO and our thesis • Cisco is another company which saw spectacular growth during the dot.com bubble. It beat Microsoft in terms of Market cap in 1999. • However, Cisco was cleared overvalued in the end when shareholders bid up the stock so high that the growth (fundamental side) could not keep up!

  17. Price highs Start up Price lows

  18. Causes • Belief that internet would become the only means of commerce (internet replacing retail) • Get Big Fast – basic investing strategy; businesses were supposed to grow as quickly as possible since the first entrant in a category will be able to keep out the challengers. But if a company was suppose to get the biggest really quick then one important question arose – how was it going to make money?

  19. 1) Business leaders did not understand direct marketing – they were not used to let numbers guide decision; so they let instincts guide decisions • 2) Technology was misunderstood by investors – since Internet was a new concept, most people were easily mislead and confused by it. Thought that Internet was a new frontier and the first one to put stake in it would succeed. They also convinced investors to fund their efforts without any proper business plan in place. • 3) Marketers overestimated the willingness of consumers to pay online – consumers were not willing to submit their billing information through the internet, many consumers were concerned about the security,

  20. Events • After the recovery from the 1991 Recession, technology began to evolve in the world • Technology became a new venture for new entrepreneurs. New companies and IPO came into the market • The NASDAQ’s trading volume exceed that of the NYSE. This showed popularity among trading dot.com stocks.

  21. Events • As 2000 came near, people realized a fatal error in technology machines. It was the Y2K bug • Y2K bug meant that there was no date on the calendar (for tech machines) for the year 2000. • Economic activities speeded up, spending increased, technology firms worked to fix the problem.

  22. Events • Federal Reserve (central bank of US) raised interest rates 7 times in 1999. Economy was out of control and inflation risks were high. • More interest rates=less margin on stocks which led to sell off on Wall Street. • Y2k problem was over when 2000 begin. Economic activities cooled down.

  23. The end events • Massive sell off on March 10, 2000. (NASDAQ reached a high of 5100. • Analyst did not like the earning reports that showed slowdown in the tech companies (expectation was very high) • Downgraded many stocks, investors followed the institution firms and dumped shares. • NASDAQ dropped from 5100 to 1100 in two years. 80% in loss. Trillions of dollars was lost in terms of market cap. • Only 50% companies survived. Many were brought by bigger ones.

  24. Some more examples • CHL(NYSE), 0941(HK), known as China mobile gained over 400% in two years alone. China Life Insurance, LFC (NYSE) 2628(HK) • Stocks like Google gained 50% from Sept. 07 to November 07. RIM gained 448% in just 2 years! • However, the central question is, during optimistic times, did we overvalued the good earning growth or news? Did speculators (the lemmings) bid stock up to any unreasonable high.

  25. Bubblelogy • The efficient market theory does take effect in the market. The allegory ,that Ben Graham used, models the market well. …. “in the short run, the market is a voting machine, but in the long run it’s a weighting machine. • Stock traders (speculators) do bid up stock prices and misjudge earning reports. If the traders bid up the stock, the earnings have to keep up. If it doesn’t, then huge sell off happen. This meant lost in investor confidence. Create fear and uncertainty-two things investors hate!

  26. Stock Analysis of Bubbles • CHL(NY) ,RIMM(NAQ), AAPL(NAQ)

  27. high bases High vol High MFI and Relative strength Numerous W/R highs

  28. Conclusion • Remember the adage “what goes up, must come down” • If investor gone too bullish for a stock, its probably a speculative investments and it is very dangerous. • The stock prices are bid up by investors and their demand. Sometimes a stock price can unreasonable if the fundamentals are consider (P/E ratio of 100!) • Therefore, after the stock market realize the unreasonable pricing, it will adjust itself (thus huge drops happen)

  29. It’s…………………. • Question time … • Feel free to ask any question that you want to ask about dot.com bubble

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