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The later half of the 1990's saw a boom in the valuation of publicly traded internet stocks. This period was known as the "internet boom". At the peak of the internet boom in February, 2000, internet public company shares in the U.S. represented 20% of the trading volume of all shares on the U.S. stock exchanges, and the market capitalization of these companies equaled 6% of the market capitalization of all U.S. publicly traded companies. Between March 10, 2000, and April 17, 2000, the technology heavy NASDAQ would lose 34% of its value.
The purpose of this paper is to address within the framework of behavioural finance theory, the effect that emotion, uncertainty, and irrational thinking can play in the decisions made by investors. Also addressed are traditional securities valuation, internet company valuations during the internet bubble, and whether the anticipated market capitalization of Google prior to its IPO was a precursor to a second internet bubble.
I. INTRODUCTION - DISCOUNTED CASH FLOW BE DAMNED: THE INTERNET AND BEHAVIOURAL FINANCE
"A conventional valuation which is established as the outcome of the mass psychology of a large number of ignorant individuals is liable to change violently as the result of a sudden fluctuation of opinion due to factors which do not really make much difference to the prospective yield; since there will be no strong roots of conviction to hold it steady." J.M. Keynes
On August 9, 1995, Netscape Communications Corporation (Netscape), an internet browser company, went public and became the first of many internet company Initial Public Offerings (IPO's) in later half of the 1990's. Netscape's shares were originally priced at $12, but due to the strong demand the share price at the time of the IPO was set at $28. The shares traded as high as $75 during their first day of trading and closed at the end of its first day of trading at $58.25, resulting in a market capitalization for Netscape in excess of $2.2 billion. For the trailing 12 month period prior to the IPO Netscape was unprofitable and had sales of less than $48 million.
The period beginning with boom of the Netscape IPO on August 9, 1995 and ending on March 10, 2000 when the technology heavy...