Intel and eBay Between March and July 2000, Intel’s stock price rose rapidly, to the
point where in July Intel’s market capitalization was above $500 billion,
making it the largest firm in the world. Then on Thursday, September 21, 2000,
Intel issued a press release indicating that its revenue for the third quarter
would grow between 3 percent and 5 percent, not the 8 to 12 percent that analysts
had been forecasting. In response to this news, Intel’s stock price dropped by 30 percent
over the next five days. Intel’s chairman, Craig Barrett, commented on
the reaction, stating: “I don’t know what you call it but an overreaction
and the market feeding on itself.” An academic study found that at the
time, virtually none of the analysts following Intel used discounted cash flow
analysis to estimate the fundamental value of Intel’s stock. Instead,
the study points out that analysts react to bad news in the same way that a
bond-rating agency reacts to bad news. Just as a bond-rating agency would downgrade
the firm’s debt, analysts downgrade their stock recommendations. After
Intel’s press release, approximately one-third of the analysts following
the firm downgraded their recommendations. Some of the recommendation changes
were extreme. Notably, the cumulative return to Intel’s stock, relative
to the S&P 500, displayed a negative trend for the period September 2000
through September 2002. In what some might see as a replay of history, consider an event that took
place at the online firm eBay during January 2005. Between the end of 2002
and the end of 2004, eBay’s shares increased by over 200 percent. During
December 2004, eBay’s stock price peaked at $118, and its forward P/E
ratio was 73. At the time, the firm’s market value was $81.7 billion.
Fourth-quarter earnings for eBay grew by 44 percent to $205.4 million, or 30
cents a share. Just as Intel had announced that its earnings growth would be lower than forecast,
eBay’s actual earnings for the fourth quarter of 2004 fell a penny below
analysts’ consensus forecasts. Meg Whitman, eBay’s CEO, stated
that future earnings would be lower because of higher advertising costs and
reinvestment. In response, eBay’s stock price fell from $103 to $81 per share. The
firm’s market value fell to $56 billion. Many analysts immediately downgraded
eBay’s stock. Rajiv Dutta, eBay’s CFO, issued a public statement
to say that his concern was managing eBay’s long-run prospects, not its
stock price. On January 26, 2005, James Stewart wrote about eBay in his Wall
Street Journal column “Common Sense.” Stewart indicated that he would consider
purchasing eBay stock in the wake of its decline. While acknowledging that
eBay could not grow at a stratospheric rate forever, Stewart noted that eBay
is in the process of transforming world commerce and has a natural monopoly.
Were he to own just one Internet stock, Stewart said, eBay would be that stock. Case Analysis Questions - Discuss whether the analysts following Intel appear to have been influenced
by any psychological phenomena, both generally and in their reaction to
Intel’s
announcement in September 2000.
- Discuss whether James Stewart’s assessment of eBay reflects any
psychological phenomena.
- In what ways are the events described at Intel and eBay similar and
in what ways are they different?
|