A study of the technology crisis in the early 21st century and the valuation of the US technology companies

Abstract

In the context of imperfections in financial market, which are no exceptions, the market price of companies usually stands a high chance of drifting away from their intrinsic value. The intrinsic value of stock is determined by fundamental indicators, for example: earnings, cash flow, company’s performance and time value of money. Mis-valued stocks result in a stock bubble or stock crisis, which has an adverse effect on the economy. An example of this problem is the technology crisis 2000s. Therefore, it is essential to understand firms’ real value and how their performance affected by being traded differently from such value so as to support companies’ investment strategy, performance management, decision making and to prevent economic crises. In order to support a solution to determining firms’ intrinsic value, a well-known valuation method in corporate finance named discounted cash flow model was relevantly applied to address the real value of thirty technology companies in the United States. Regarding the influence of misevaluation on the companies’ performance, a time series of their price to earnings ratio from when the previous technology crisis burst in 2001 to 2017 was demonstrated. Data used was numeric and collected from companies’ financial statements and the stock market database. Microsoft Excel was the tool used for data analysis. The results showed that fifteen among thirty companies were overvalued and the other fifteen firms were undervalued. Among those, one company had negative real value. The series of price to earnings ratio implied that from 2001 to 2017, the companies’ performance had been unstable even though their stock’s market price had been increasing significantly. To conclude, almost every technology company was mis-valued, which made their performance unstable and contradicted to their market value on which irrational investors base their investing decision.