Share Prices Of Dot Com Stocks example essay topic

Intro In this report we will discuss the E-commerce bubble burst and its subsequent crash in March 2000. We will examine what happened during this time and what caused the bubble to burst. In order to understand these events, it is important to firstly comprehend what Dot-com is and its purpose. Dot-com can be defined as a company whose main market is on-line trading. An example is Amazon who doesn't operate off-line. We will use case studies such as Pet-com and companies such as Amazon to illustrate this.

We will discuss in our opinions, the long-term effects of the 2000 crash and how it has affected investor's confidence. In 1997 online trading was beginning to become widely recognised and by 1999 E-commerce was worth lb 2 bn in the UK. More and more people started to have access to the Internet. It is important to know what happened to E-commerce in March 2000. Before the crash, the share prices of Dot-com stocks were priced too high and although investors knew about this, they kept on investing in them as they thought it was a good investment and had great potential.

The price of the shares kept on rising and rising until March 2000 when its price started to plummet. Therefore employees were made redundant, some Internet shops were closed down and others went into liquidation after investing heavily. The main cause of this was that on-line firms had far too many overheads relative to sales revenue generated but they kept on expanding and expanding, subsequently debts started to build up which they could not afford to pay up. An example is Amazon, an established on-line business, which started off just selling books then expanded to videos, CDs and continued to expand to other markets. Amazon had spent many years struggling to meet their overheads; which are not directly applied to the product. Other companies saw this as a good opportunity.

Therefore they followed suit, without working their way up, and went straight into the market to compete with established firms. The cost involved in setting up this method of trading was neglected and firm's overheads were far too high compared to the revenue they were generating. On-line firms such as Pet-com who spent on $3 m for each TV commercial which was pointless and a waste of money as people could not remember the URLs. This section will look at what happened after the Stock market crash of March 2000 and how it generally affected investors confidence. Post March 2000 the Us NASDAQ has suffered in a period of instability, an investor in the Financial Times (FT) said, ' Volatility has become bewildering. ' (April 14 2000).

In periods of volatility, where stock prices are falling, it is widely regarded that Government Bonds (specifically US or UK) are seen to be less risky than shares and therefore investors will switch their funds from shares to bonds. If the bond prices are increasing then there is greater demand for the bond and less confidence needed than more risky assets, such as shares, that can bring a higher return. The table and graph below show the price changes of a 10 year US Government Bond. Date Prices (US $) 25/02/1999 95 29/32 22/02/2000 100 11/16 24/02/2000 101 1/32 27/02/2001 100 11/16 26/02/2002 99 29/32 The graph clearly illustrates that the price of a bond is highest on the 24/02/00, just before the crash, when investors were already worried about what may happen "would the bubble burst?" Between the 22nd Feb 2000 and the 24th Feb 2000 there is a 0.5% increase in the price of a bond indicating that there was a growing concern about the market and this is a sign that investors were already loosing confidence. In our opinion, investors are not as confident in the market after March 2000 as they were in Feb 1999; the bond prices can be used as a rough guide. Long-term effects on the market are very hard to judge, this is because new information is constantly being fed to the market.

Major geopolitical events such as September 11th, war in Afghanistan and the war in Iraq will have a much bigger effect on investor confidence in 2001, 2002 and 2003 respectively than the crash in Marsh 2000. We believe that the effect of the Crash in March 2000 will affect specific sector risk and high technology stock; in particular, those with many links with the Internet will be viewed as riskier investments. Investors will consider companies such as Amazon very risky and many investors will have little confidence in their ability to perform until the company can prove otherwise. If and when Internet based companies like Amazon start to produce consistently good results that can be maintained they will be viewed as less risky investments and they may attract more investors. Another factor making the effects of the crash hard to measure is that there has been a global downturn in markets. This makes evaluating the effects hard as many companies, whichever sector they are in, are performing poorly in comparison with the highs of early 2000.

Investors will have no doubt learnt some very valuable lessons as to why the stock market crashed and will be weary in the future about new technology and unproven companies. The market will have also learnt and should know that value IPO's (Initial Public Offering) are issued at should not overstate the company's value (i.e. shares are not priced too high or too low). PETS. COM March 2000 was an interesting month, for technology-based companies, in the financial markets.

The NASDAQ reached an all time high of 5048.62, four technology firms entered the FTSE 100 and Lastminute. com had its IPO in the UK where shares soared up 28% on day one. With all this positive news, the dot. com bubble was expanding to new heights similar to the expansion it had seen over the previous year. Deep inside the bowels of the dot. com companies, far from the publics' eyes, problems were surfacing. The mainstays of companies were beginning to feel the effects of overspending and under selling. The highs of March were about to turn to the lows of April and the following twelve months. On Friday 14th April Wall Street experienced its biggest one-day slide in history.

That week two trillion dollars in stock market value was lost with the NASDAQ taking the main knock. The values of technology and dot. com shares had dropped significantly; some analysts had foreseen this because the shares were known to be hyped and overvalued. This led back to the idea that had floated in financial circles, that the dot. com companies could rewrite the laws of economics, due to the unnatural levels of spending in relation to revenue. Now it is seen that this was not the case. The revaluation of the dot. com stocks came as a blow to the bubble but not a fatal one. This was to come a month later when companies started to disappear and this fuelled the fire upon which the technology stocks were to burn.

In May 2000 Boo. com collapsed after spending $135 million, it was the first major company to collapse. In November the US stock market lost its first quoted dot. com; Pets. com collapsed along with garden. com and furniture. com. Other major players such as etoys. com failed in the subsequent months. In April 2001 layoffs in the USA, as a result of the crash, reached a peak of 17,554 a month and in May 2001 the number of closures per month reached 64. The companies were closing as at a ferocious rate as investors pulled funding away from struggling companies. This led to September 21st 2001 when the NASDAQ closed at 1423.19 less than 25% of the value it held just 18 months prior.

The dot. com companies tried to be the biggest and the best in their respective fields. Aiming for record customer levels and leaving the rest to be worried about later. These debts accumulated and caught up with the companies as is clearly seen in the case of pets. com. Pets. com's aim was to be the largest e-tailor of pet related products.

It had a good idea to sell pet products and food online, using the slogan "Because pets can't drive". It was founded in February 1999 and entered a market that had 3 other main competitors, one of which was a bricks and mortar companies online venture, petsmart. com. Pets. com's rivals largely collapsed also all apart from petsmart. com the bricks and mortar company. Pets. com was backed by some of the biggest names with Amazon. com holding a 43% share in the company. Pets. com overspent like many other dot. com companies and for the quarter ended September 30th 1999 they lost $15.9 million on $568,000 in revenue and $19.4 million on $619,000 in revenue overall since their inception. In the fourth quarter of 1999 pets. com lost $42.4 million on $5.2 million in revenue.

The reason for such astronomical losses was that pets. com had a negative gross margin and were selling products cheaper than they cost. To make matters worse pets. com spent $3 million on a 30 second advertisement that aired during the super bowl. This shows that the company's sole goal was to increase its customer base as opposed to cutting costs. One month later in February 2000 pets. com floated on the NASDAQ under the symbol PET, the company made $82.5 million was made in the IPO. The company struggled for several more months before collapsing in November 2000. What is investor confidence?

One critical factor in determining the success, or even the fate, of any company is the confidence of those providing finance. Changes in investor confidence can apply equally to an individual equity or organisation, a particular market sector, or even an entire market or country. Precedents in investor confidence apply in the same manner, and one analyst's perception may be used in another's judgement, etc etc. Investor confidence in dot com context The 'Dot com boom' investor confidence was initially boosted by promises of a revolutionary new platform for business. The prospect of low overheads compared to their high street counterparts, and the importance of being the first to market were two of the core emphases of many dot com business plans. In timescales of six to twelve months, ambitious MBA graduates and their tech-savvy boards aimed to corner niche markets across the world using this exciting new medium.

Venture capitalists and financial analysts shared their enthusiasm. Realising that there was an opportunity to create a new generation of mainstream retail outlets - dubbed 'e tailers' - many lucrative finance deals were enabled, much to the disbelief of more prudent investors. The rise Confidence had been established. The first wave of new economy businesses opened their virtual doors, and began to show moderately successful earnings as consumers and businesses alike got to grips with the much-touted new method of doing business. These early adopters enjoyed the prestigious status of being 'market leaders', by the sole virtue that they were the only players. Billions of dollars in venture investment flowed worldwide, and adventurous start-ups began to look to stock market floatation's to raise more and more capital.

The letters 'IPO' (Initial Public Offering) began to enter not just job adverts but also business plans, and quickly became a clear short-term goal of many start-ups. Young management teams threw lavish parties as their stocks floated on the NASDAQ composite index, where risk takers speculating on the success of the new economy as a whole invested in droves and further fuelled not only stock prices, but also analysts' confidence. The mistakes What was once an exclusive playing field for a select few now became a free for all. As competition quickly increased the new economy showed that unlike the high street, there is room for more than one leader. It was quickly realised that whilst business could happen at the speed of thought, this does not of course imply that it will. As CEOs and financiers negotiated further rounds of funding for these fledgling companies with very large market capitalisation's, returns did not duly follow.

Ambitious national and international advertising campaigns began. Some 'dot com' companies by this time had branch offices and payrolls around the globe, whilst operating with a single figure client base. An example of the lavish advertising can be seen in America's football 'superbowl' event. Watched by America's largest television audience (135 million approx), household names were left vying for precious advertising minutes with six-month-old ventures - pushing the estimated cost to $53,333 per second. Competition was so fierce that global finance organisation Mastercard made the decision to bow out of superbowl advertising for the first and only time in 2000. Copycat approach Mixed reviews were received by marketeers and advertising experts.

Some were critical of the 'copy cat' approach. Whilst the more mature 'dot coms' had used the much-relished superbowl advertising successfully, for many it was a premature and futile attempt to establish a footprint for a brand that did not yet exist. The advertising and rush to global ise appeared to win yet more credibility. Dot coms now had the staffing and infrastructure of many bricks and mortar businesses; the only thing missing was the business itself.

The Fall More and more companies appeared, many applying a similar model with a grossly exaggerated speed of growth and ambitious expansion plans. The latter period of 2000 has been dubbed by some as a 'gold rush', with reference to the speed of formation and density of new e-commerce ventures. Analysts provided positive outlooks of the boom that was under way in this 'new economy'. Very soon it became time to deliver. Ironically it was the question of delivery, not just of financial results, but tangible goods and services upon which many 'e-tailers' became unstuck. As numerous online shop front ventures strived to quell consumer fears of inflated delivery costs and slow receipt of goods, more reckless spending occurred with promises of 'free next day delivery' and the matching or undercutting of high street prices.

Nothing is truly free of course, and the debts to distributors and couriers quickly spiral led. Unfortunately the overhead savings which underpinned many ventures were now long lost. Analysts surveyed overvalued stocks, delivering scathing reports on how these new ventures would be required to develop customer bases numbering billions in order to merely survive. Whereas previously profits were expected to flow within a matter of months, some forecasters now predicted the sickest dot-com businesses would need a decade or more of vigorous growth to enable a full return on the investments made. There was no sudden collapse of dot com stocks - rather a slow pattern of downsizing and closures amidst an atmosphere of rejection and ridicule from the one time friendly analysts. Venture capitalists once again adopted an attitude of prudence, and the bubble burst.

Worldwide offices were the first to suffer - many staff in foreign countries learning of their downsizing when their salaries stopped being paid. Another gold rush began - the rush for staff to remove anything of value from their lavish office suites before the debt collectors moved in. Fortunately for them, many management and executive staff were hard to find at the time. An error of judgement? Many analysts and investors - even dot com executives - 'cashed out' before the collapse. Perhaps aware of the bad news that was to come, these individuals sought to maximise their personal gain whilst the stock markets still looked favourably upon their portfolios.

There were also losers of course. Many pension funds suffered as the value of their dot-com holdings shrivelled in a matter of months, and private investors around the world lost personal fortunes. The question remains as to whether or not analysts deliberately misled investors in order to bolster the position of a privileged few. In this regard investors will certainly show more reluctance not only in investing in high risk pioneering 'new business's stocks, but also perhaps will appreciate what it means to take a risk.

Conclusion thoughts: - Bringing more clients to the marketplace - ie, amazon will benefit from collapse of other online booksellers o Knock on effect: loss of customers from high street - Knock on effect in other industries: ie, telecoms / internet provider industry - Bringing some kind of confidence in buying online (relates to first point), thus, taking market share away from high street, opening their eyes to new stuff etc etc CONCLUSION What generally happened in the Dot COM crash of 200 o was that investors realized that Dot COM was too high for the value and the share price collapsed. The Dot Com is basically people believed in high technology. On aspect of was the creating websites. Companies that were regular firms quite often made website and turned themselves into appearing as if they were a new technology company and others became the developer for these website. Shares in this industry were thought to be the future and so boomed more than ever. In the end it didn't live up to expectations of the bubble and it burst.

Investors lost a lot of money and since the general stock market was going downwards with the crash in September 2002. The crash of 200 o created within others but had to wait 2 years after before the general stock market would collapse as well. People lost confidence!

Bibliography

Hard, proper, facts from reputable sources. BBC News: 'High street names to beat dot coms" web 5th January 2001.
BBC News: 'E Shopping wins customer approval' web 3rd January 2001 web 'Nasdaq's year of turmoil' superbowl-ads.