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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

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