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Mohamed Ragab Mostafa Mazen DOT-COM CRASH

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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.
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.
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.
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%

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REASONS BEHIND THE GROWTH OF THE BUBBLE

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

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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>

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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>

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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>

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The Peak <ul><li>March 10, 2000 </li></ul><ul><ul><li>NASDAQ reached 5132.52 </li></ul></ul>

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CAUSES OF THE COLLAPSE

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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>

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Lockup Period Expiration

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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>

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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>

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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>

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The Crash

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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>

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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>

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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>

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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>

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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>

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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>

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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>

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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>

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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>

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THANK YOU <ul><li>Questions? </li></ul>