HAMISH MCRAE: Netflix has joined the real world


The crash in Netflix’s stock price last week carries a broader message for investors in US tech giants. It’s that successful, trendy businesses can stop their rat race for growth and become, well, more like the rest of the global business pack.

And when that happens, the basis on which they are valued changes. Instead of being evaluated for their imagined future prospects, they will be evaluated for their current profitability.

They will likely continue to be successful, but they will have to prove their worth to a more skeptical community of investors.

Skeptical: Last week’s Netflix stock price crash carries a broader message for investors in US tech giants

The history of Netflix is ​​quite simple. He pioneered online streaming and then used that position to generate wonderful content, including of course Bridgerton.

But to justify its valuation, it had to continue to accumulate subscribers. When that growth faltered, its stock price crashed.

In November of last year, his shares were worth $700 each. On Friday, the price was below $215. It’s still a big business, worth $100bn (£75bn) – about the same as BP. But if you bought his shares last November, you’d feel a little bad.

Now think more broadly about the tech giants. They are all different, but all play a major role in almost everyone’s daily life. Apple, the most valuable of the lot, is currently worth $2.7 trillion, well below the peak of $3 trillion earlier this year. This equates to a decline of more than 8%.

Its rival Microsoft is down almost 16%, Amazon down more than 12%, Alphabet (parent company of Google) down almost 14% and Meta (parent company Facebook) down 43%. Tesla, despite all the hype around Elon Musk, is down 16% so far. These are steep declines, slightly mitigated for UK and European investors by the rising dollar.

So what happened to the FTSE100 index this year? On Friday, it closed at 7,522, just a little higher than its opening level of 7,505 on January 4.

Falling valuations of US tech giants do not mean they will decline commercially. They can go on just fine. It’s just that a reasonable valuation for Apple may be $2 trillion, not $3 trillion. Change is in mood.

What led to this? Well, the obvious answer is that money isn’t free anymore. Central banks have been late in starting to raise interest rates, but bond markets are well ahead of them.

Last week, the yield on ten-year gilts rose above 2% in interday trading, the highest since 2015. Ten-year US Treasuries were trading at just under 3%. Ten-year German government bonds were just below 1%, the highest since 2014. That may not seem like much, but at the start of last month the yield was negative.

The most striking example of changing market sentiment is what happened to Spacs – special purpose acquisition companies.

You may recall they were all the rage a year ago – companies mostly brought in New York to buy other companies, without disclosing what those companies might be. They have been dubbed “blank check” companies, with some justification. Well, they’re still here, and Spac’s number of mergers or acquisitions peaked at 104 in the last quarter of 2021.

However, they have now fallen back to 66 in the first three months of this year. There are hundreds of Spacs that haven’t found anyone to buy from or partner with. Regulations are getting tougher and the boom is over. So if high-tech America is losing its luster and frothy concepts like Spacs are no longer in vogue, what do you do? Where is the security?

There is no easy answer, other than to say that the traditional bond haven is absolutely not the place to be.

Nobody knows how fast the rise in bond yields will be and how far it will go.

But since bond prices move inversely to yield, buyers are almost certain to lose money.

The most useful thing to note is that, over the very long term, global equities have produced a real return of around 5% in the UK and 6% in the US.

There are dozens of great companies around the world that cater to our daily needs and those with established brands should be able to raise their prices enough to navigate through this cost spike.

Not glamorous – but we need toothpaste even if we don’t need a Netflix subscription.

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