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 <ul style="display: flex;"><li style="flex:1">Recommended by, </li><li style="flex:1">Acknowledged by, </li></ul>Ir. Farida Komalasari, M.Si. Student Advisor Irfan Habsjah, MBA, CMA Head of Management Study Program iDECLARATION 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 vTABLE 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. b. The Primary Market ..................................................................................... 24 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......................................................................................... 32 2.9.2. Inter@ctive Week Index .............................................................................. 33 2.9.3. Nasdaq Internet Index .................................................................................. 33 2.10. Criteria of Dot-com Bubble.......................................................................... 34 CHAPTER III - METHODOLOGY.............................................................. 37 - 45 3.1. Research Method ......................................................................................... 37 3.2. Research Instrument..................................................................................... 38 3.3. Sampling Designs ........................................................................................ 38 3.4. Data Analysis............................................................................................... 39 3.4.1. Fundamental Analysis.................................................................................. 39 <ul style="display: flex;"><li style="flex:1">a. </li><li style="flex:1">Earnings per Share ....................................................................................... 40 </li></ul>vii b. c. d. e. Price Earnings Ratio..................................................................................... 41 Price Earnings Growth Ratio........................................................................ 42 Free Cash Flow Yield................................................................................... 43 Financial Leverage....................................................................................... 44 CHAPTER IV – ANALYSIS OF DATA AND INTERPRETATION OF RESULT.......................................................................................................... 46 - 59 4.1. Fundamental Analysis.................................................................................. 46 4.1.1. Index Price Level ......................................................................................... 47 4.1.2. Price versus Earnings .................................................................................. 47 4.1.3. Price Earnings Ratio..................................................................................... 49 a. b. c. d. e. Price Earnings of All Indices........................................................................ 50 S&P 500 versus Nasdaq Composite ............................................................. 51 S&P 500 versus Nasdaq Computer Index ..................................................... 52 S&P 500 versus AMEX ............................................................................... 53 S&P 500 versus QNET ................................................................................ 54 4.1.4. Price Earnings Growth ................................................................................. 55 4.1.5. Free Cash Flow Yield................................................................................... 57 4.1.6. Financial Leverage Ratio.............................................................................. 58 CHAPTER V – CONCLUSION AND RECOMMENDATION ................... 60 - 62 5.1. Conclusion................................................................................................... 60 5.2. Recommendation ......................................................................................... 62 LIST OF REFERENCES ...................................................................................... 64 APPENDICES ....................................................................................................... 71 viii LIST OF TABLES <a href="#0_0">Table 1 </a><a href="#0_0">– </a><a href="#0_0">Top 10 Largest Companies by Market Cap on S&P 50</a><a href="#0_0">0</a><a href="#0_0">.</a><a href="#0_0">.......................... 30 </a><a href="#0_1">Table 2 </a><a href="#0_1">– </a><a href="#0_1">Price Index Changes percentage (2009-2012)........................................... 47 </a><a href="#0_0">Table 3 </a><a href="#0_0">– </a><a href="#0_0">PEG ratio for all Indices in 2012 .............................................................. 57 </a><a href="#0_2">Table 4 - Average Financial Leverage year 2002-2012 ............................................ 59 </a>ix LIST OF FIGURES <a href="#14_0">Figure 1 - The Peak of the Dot-com Bubbl</a><a href="#14_0">e</a><a href="#14_0">............................................................... 2 </a><a href="#15_0">Figure 2 </a><a href="#15_0">– </a><a href="#15_0">Number of Website year 1990 - 2008........................................................ 3 </a><a href="#17_0">Figure 3 </a><a href="#17_0">– </a><a href="#17_0">Theoretical Framewor</a><a href="#17_0">k</a><a href="#17_0">.</a><a href="#17_0">............................................................................ 5 </a><a href="#0_3">Figure 4 </a><a href="#0_3">– </a><a href="#0_3">Main Stages in a Bubble ......................................................................... 26 </a><a href="#0_4">Figure 5 </a><a href="#0_4">– </a><a href="#0_4">Nasdaq Composite Price Index (1995-2005) ........................................... 34 </a><a href="#0_5">Figure 6 </a><a href="#0_5">– </a><a href="#0_5">Nasdaq Composite: Price Vs Earnings (1995-2015</a><a href="#0_5">)</a><a href="#0_5">.</a><a href="#0_5">............................... 35 </a><a href="#0_0">Figure 7 </a><a href="#0_0">– </a><a href="#0_0">Difference in Price versus Earnings of Nasdaq Composite ...................... 36 </a><a href="#0_6">Figure 8 </a><a href="#0_6">– </a><a href="#0_6">Price Earnings of Nasdaq Composite (1995-2005</a><a href="#0_6">)</a><a href="#0_6">.</a><a href="#0_6">................................. 36 </a><a href="#0_7">Figure 9 </a><a href="#0_7">– </a><a href="#0_7">Research Framework .............................................................................. 37 </a><a href="#0_8">Figure 10 </a><a href="#0_8">– </a><a href="#0_8">Price Index from 1995-2011.................................................................. 46 </a><a href="#0_9">Figure 11 </a><a href="#0_9">– </a><a href="#0_9">QNET Difference in Price versus Earnings ........................................... 47 </a><a href="#0_1">Figure 12 </a><a href="#0_1">– </a><a href="#0_1">AMEX Difference in Price versus Earnings .......................................... 48 </a><a href="#0_10">Figure 13 </a><a href="#0_10">– </a><a href="#0_10">Nasdaq Computer Difference in Price versus Earnings.......................... 48 </a><a href="#0_11">Figure 14 </a><a href="#0_11">– </a><a href="#0_11">Nasdaq Composite Difference in Price vs Earning</a><a href="#0_11">s</a><a href="#0_11">.</a><a href="#0_11">.............................. 49 </a><a href="#0_12">Figure 15 </a><a href="#0_12">– </a><a href="#0_12">Price Earnings of All indices................................................................. 50 </a><a href="#0_13">Figure 16</a><a href="#0_13"> </a><a href="#0_13">– </a><a href="#0_13">Price Earnings for S&P 500 versus Nasdaq Composite ........................ 52 </a><a href="#0_14">Figure 17 </a><a href="#0_14">– </a><a href="#0_14">Price Earnings for S&P 500 versus Nasdaq Computer........................... 53 </a><a href="#0_15">Figure 18 - Price Earnings for S&P 500 versus AME</a><a href="#0_15">X</a><a href="#0_15">.</a><a href="#0_15">........................................... 54 </a><a href="#0_1">Figure 19 - Price Earnings for S&P 500 versus QNE</a><a href="#0_1">T</a><a href="#0_1">............................................. 55 </a><a href="#0_16">Figure 20 </a><a href="#0_16">– </a><a href="#0_16">PEG for all Indices................................................................................ 56 </a><a href="#0_17">Figure 21 - Free Cash Flow Yield for all Indices...................................................... 58 </a><a href="#0_18">Figure 22 - Financial Leverage for all Indice</a><a href="#0_18">s</a><a href="#0_18">.</a><a href="#0_18">......................................................... 59 </a>xLIST OF ACRONYMS AMEX CFO CSE American Stock Exchange Chief Financial Officer Common Shareholders’ Equity Dow Jones Industrial Average Earnings per Share DJIA EPS GDP GICS IPO Gross Domestic Product Global Industry Classification Standards Initial Public Offering <ul style="display: flex;"><li style="flex:1">ICB </li><li style="flex:1">Industry Classification Benchmark </li></ul>Information Technology Mergers and Acquisitions National Association of Securities Dealers Automated Quotation New York Stock Exchange Over the Counter IT M&A NASDAQ NYSE OTC <ul style="display: flex;"><li style="flex:1">P/E </li><li style="flex:1">Price Earnings </li></ul>PEG QNET S&P Price Earnings Growth Nasdaq Internet Standard and Poor’s <ul style="display: flex;"><li style="flex:1">U.S. </li><li style="flex:1">United States </li></ul><ul style="display: flex;"><li style="flex:1">VC </li><li style="flex:1">Venture Capital </li></ul>xi CHAPTER I INTRODUCTION 1.1. Background of the Study In the ‘90s, the first dot-com bubble (internet bubble) burst. It was a speculative bubble within the Internet related services, well known as the “dot-com”. It all started on the second half of the 1990s was raised a new kind of economy, where in stock market happened high grow rates under the influence of venture capital and the IPO-funded companies in the internet sector. High volume stock speculation was driven by the fact that this was a fresh industry with high potential, but then also one where companies were difficult to value. Investors were looking for ‘hot’ stocks triggered high demand for tech stocks in general, as well as causing the overvaluation of many companies in this field. Stocks price were going higher, higher and higher. At that time people did not follow Warren Buffett. He noted in a letter that technology investors have overstayed the party. He said many of investors had been hypnotized by the staggering ascent of tech stocks and ignored everything else. People was seen him as the old man and his value investment style seen as old style. They ignored the fundamental rules of investing in stock market, such as analyzing P/E ratios, studying market trends, and reviewing business plans. Alan Greenspan stated irrational exuberance as a warning that the market might be overvalued. At its peak, even companies which had never made any revenue were pushed onto the stock exchange and were 1trading at extremely high values when one looked at the bottom lines of these companies—which were extremely negative in most cases. In March 2000, the technology stock index Nasdaq had reach its peak at over 5,000 points and become the climax of dot-com bubble. Many of internet companies packed up and leaving investors with significant losses. Figure 1 - The Peak of the Dot-com Bubble Source: Darren Jamieson, justsearchdigital.co.uk, 2007 The dot-com bubble was inflated by unfettered enthusiasm about the success of internet-based companies, as well as by eager speculation by venture capital firms, which saw a chance to generate profits based primarily on prospects and valuation rather than on true profitability. After the bubble burst almost 5000 of these dotcom companies either disappeared or were absorbed. Only the one which were truly profitable outside the financial markets survived such as Amazon, Yahoo, and Ebay (Colombo, bubblebubble.com). 2In the past few decades, rapid technology innovations have greatly increased. It makes fast enlargement in implementation of information technology into

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

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