We Caused the High Tech Bubble

In July of 2000, someone bought JDS Uniphase at $140.50 per share! Look at the price history of JDSU shown in Exhibit 3-2. The company had less than a billion dollars in sales and lost money by the hundreds of millions of dollars. Based on its 1.52 billion shares outstanding, JDSU had market equity of over $200 billion—more than 200 times revenue, and it had a price/earnings ratio of infinity. JDSU may have been a good company with bright prospects, but its underlying operations and business should never have justified $200 billion in market equity. How could we bid the price of a company with operating characteristics like JDSU to such a stupid level? JDSU closed 2002 at $2.47 per share.

How about an investment in Internet Capital Group? Someone paid $200.94 per share for ICGE. At that time, ICGE had negative book value

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EXHIBIT 3-2 JDSU Five-Year Stock Price Chart and $131 million in sales. Could these performance numbers ever justify its total market equity of over $50 billion in January 2000? Why buy stock in a risky company that is trading at a very high price? The shares trade now at $0.36 per share—that's 36 cents per share, and ICGE has market equity of about $100 million—down 99.9 percent from its high. We'd prefer buying shares in ABC Utility Company.

How about Lucent? This was a real company, one that had substantial revenues, thousands of employees, and billions in assets. One of the authors of this book owned a small amount (under 100 shares) of Lucent that he received in its 1996 spinoff from AT&T. He watched as LU hitched its fortune to the fiber optic cable craze, and its price increased to $64 per share—for a total equity value of over $200 billion on Lucent's 3.4 billion shares.

In September of 1999, he answered a posting regarding Lucent on the message board of the Web site, www.valuepro.net/, owned and administered by the authors of this book. The posting questioned the $64 price of Lucent and referenced a DCF valuation of Lucent, which was done by the postor and showed an intrinsic value of less than $10/share. The postor used an earlier version of the ValuePro 2002 software for his Lucent valuation. The author checked the assumptions underlying the lower valuation, found no holes or oversights in the valuation, emailed his thanks to the postor, and sold the shares at $64. A month later he was second-guessing himself as Lucent continued its rise to $75. Ultimately, the market realized that LU had no clothes. From that $75 peak, the stock price declined steadily (see Exhibit 3-3) to $1.26 per share on December 31, 2002.

The reality underlying the high-tech bubble is that all investors— individuals and institutions, domestic and foreign, women and men, workers and retirees—bid stock prices of companies up to unrealistic levels. The operating profits of the underlying businesses of the companies could never support the overvaluation by the market. We all participated in this stupid activity. We all are at fault. We all are guilty.

True, the stock analysts of Wall Street urged us to pay up to buy shares of these great companies. Henrico, the Internet analyst said, "No price is too high for a great company. The real risk is not buying, standing on the sideline, seeing your aggressive, risk-taking neighbor or coworker make bundles in the market, while conservative, cautious YOU owns bonds and money market funds and misses the upward










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EXHIBIT 3-3 LU Five-Year Stock Price surge in stock prices and all of its associated excitement." Unfortunately, many of us listened to Henrico's self-serving spiel and continued to inflate the bubble. And we have participated in the excitement— on the downside.

How should you test your stock valuation insights or the plausibility of stock tips of others? You can pick up investment reports from stock brokerage firms to see what conflict-laden stock analysts, such as Henry Blodget, Jack Grubman, and Mary Meeker, are (or were) saying about these stocks. Or you can test these investments yourself with the same valuation procedures employed by Wall Street investment bankers and stock analysts—using the techniques described in this book. Plus, with your own analysis you at least can be sure that your assumptions are conservative and there are no unstated conflicts of interest underlying a valuation or recommendation.

Investors should have cared enough to spend the small amount of time that was necessary to see that the operations of ICGE, JDSU, LU, and thousands of similar companies could not support the market equity levels that we were bidding them up to. The rise in stock prices would have dampened, and the subsequent bursting of the bubble could have been avoided. We contributed to the problem. We did not have to invest in the stock market when it was at historic levels that were ridiculously high. Read on and learn how you can properly value stocks in the manner of our ABC Utility Company and avoid investing in grossly overpriced companies.

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