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Analysis of New Dot-Com Bubble in U.S. Stock Market

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Analysis of New Dot-Com Bubble in U.S. Stock Market ANALYSIS OF NEW DOT-COM BUBBLE IN U.S. STOCK MARKET FOR PERIOD 1995 - 2012 By Renate Shafrila Dwima Pranandya ID No. 014200900131 A Thesis presented to the Faculty of Economics President University in partial fulfillment of the requirements for Bachelor Degree in Economics Major in Management March 2013 THESIS ADVISER RECOMMENDATION LETTER This thesis entitled “Analysis of New Dot-com Bubble in U.S. Stock Market for Period 1995 – 2012” prepared and submitted by Renate Shafrila Dwima Pranandya in partial fulfillment of the requirements for the degree of Bachelor of Science in the Faculty of Economics has been reviewed and found to have satisfied the requirements for a thesis fit to be examined. I therefore recommend this thesis for Oral Defense. Cikarang, Indonesia, March 20, 2013 Acknowledged by, Recommended by, Irfan Habsjah, MBA, CMA Ir. Farida Komalasari, M.Si. Head of Management Study Program Student Advisor i DECLARATION OF ORIGINALITY I declare that this thesis, entitled “Analysis of New Dot-com Bubble in U.S. Stock Market for Period 1995 – 2012” is, to the best of my knowledge and belief, an original piece of work that has not been submitted, either in whole or in part, to another university to obtain a degree. Cikarang, Indonesia, March 20, 2013 Renate Shafrila Dwima Pranandya ii PANEL OF EXAMINERS APPROVAL SHEET The Panel of Examiners declare that the thesis entitled “Analysis of New Dot-com Bubble in U.S. Stock Market for Period 1995 – 2012” that was submitted by Renate Shafrila Dwima Pranandya majoring in Management from the Faculty of Economics was assessed and approved to have passed the Oral Examinations on March 4, 2013. Misbahul Munir, MBA, Ak, CPMA Chair - Panel of Examiners Drs. Bruno Rumyaru, MA Examiner 1 Ir. Iman Heru Wijayanto, MBA Examiner 2 iii ABSTRACT The development of technology nowadays has made people overvalue technology companies and it could create a new dot-com bubble. This thesis provides an analysis of new dot-com bubble in U.S. Stock market that focus in the technology industry, especially within internet sector. The analysis aims to clarify the speculations of a new-dot com bubble in U.S. stock market. In this thesis, the researcher compared the criteria of first dot-com bubble with the current condition to indicate the possibility of new dot-com bubble. The researcher also compares the development in fundamentals based on today and previous bubble. Data analysis used to see the possibility of the new dot-com bubble is fundamental analysis. There are several kinds of ratios from fundamental analysis that applied to conclude on the current market situation as well as the trends in the internet sector compared to the general market. The ratio chosen in this thesis are Price Earnings ratio (P/E ratio), Price Earnings Growth ratio (PEG ratio), Free Cash Flow Yield, and Financial Leverage Ratio. S&P 500 index is chosen as a representative for U.S. Stock Market. Nasdaq Composite, Nasdaq Computer Index, Intr@ctive Week Internet Index and Nasdaq Internet Index are four indices representing the internet sector in the U.S. The comparisons of ratio values between these four indices to the general market indicate high interest in internet sector. The result shows Internet sector are in mania phase at this time. Moreover, the result also show U.S. Stock Market is not in a new dot-com bubble and there are tendencies pointing towards for making of a bubble. Keywords: Dot-com Bubble, Free Cash Flow Yield, Financial Leverage ratio, Fundamental Analysis, P/E ratio, PEG ratio, Technology iv ACKNOWLEDGEMENT Thanks to God Almighty for the completion of this bachelor’s thesis. Only due to His blessings and power that work within me I could finish my thesis. I deeply thank with the people behind my life for inspiring, guiding and accompanying me through thick and thin. It is a pleasant moment to express my heartfelt gratitude to all. I would like to express my deepest gratitude to my adviser Mr. Iman Heru Wijayanto and Mrs. Farida Komalasari for their patience, invaluable advice and suggestions. I am desirous to individually thank all of my friends but as the list might be long and for fear I might omit someone, I will merely and frankly say: Thank you to you all for your love, support, care and trust. Finally, I would like to thank my wonderful father, mother and sister for their infinite support throughout everything. March, 2013 Renate Shafrila Dwima Pranandya v TABLE OF CONTENTS THESIS ADVISER RECOMMENDATION LETTER .......................................... i DECLARATION OF ORIGINALITY ................................................................... ii PANEL OF EXAMINERS APPROVAL SHEET ................................................. iii ABSTRACT ............................................................................................................ iv ACKNOWLEDGEMENT ....................................................................................... v TABLE OF CONTENTS ....................................................................................... vi LIST OF TABLES .................................................................................................. ix LIST OF FIGURES ................................................................................................. x LIST OF ACRONYMS .......................................................................................... xi CHAPTER I - INTRODUCTION .................................................................... 1 - 11 1.1. Background of the Study ................................................................................ 1 1.2. Problem Identification .................................................................................... 4 1.3. Statement of the Problem ............................................................................... 4 1.4. Research Objectives ....................................................................................... 5 1.5. Significance of the Study ............................................................................... 5 1.6. Theoretical Framework .................................................................................. 5 1.7. Assumptions and Hypothesis.......................................................................... 6 1.8. Scope and Limitation of the Study.................................................................. 6 1.9. Research Outline ............................................................................................ 7 1.10. Definition of Terms ........................................................................................ 8 CHAPTER II – LITERATURE REVIEW .................................................... 12 - 36 2.1. Market Efficiency ........................................................................................ 12 2.2. Behavioral Finance ...................................................................................... 14 vi 2.2.1. Herd Behavior .............................................................................................. 16 2.3. Initial Public Offering .................................................................................. 18 2.3.1. Motives for Going Public ............................................................................. 18 2.3.2. Private versus Publicly Held ........................................................................ 19 2.3.3. Timing ......................................................................................................... 20 2.3.4. Mispricing.................................................................................................... 21 2.3.5. Findings ....................................................................................................... 22 2.4. The Stock Market ......................................................................................... 22 2.4.1. The Markets ................................................................................................. 23 a. The Primary Market ..................................................................................... 24 b. The Secondary Market ................................................................................. 24 2.5. The Information Technology Market ............................................................ 25 2.6. Main Stages in a Bubble............................................................................... 26 2.6.1. Stealth Phase ................................................................................................ 27 2.6.2. Awareness Phase .......................................................................................... 27 2.6.3. Mania Phase ................................................................................................. 28 2.6.4. Blow Off Phase ............................................................................................ 28 2.7. Standard & Poor’s ........................................................................................ 29 2.7.1. Standard & Poor’s 500 Index ....................................................................... 29 2.8. Nasdaq ......................................................................................................... 30 2.8.1. Nasdaq Composite Index.............................................................................. 31 2.9. American Stock Exchange ........................................................................... 31 2.9.1. Nasdaq Computer........................................................................................
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