HAMISH MCRAE: Netflix has joined real world

The collapse of the share price of Netflix last week carries a wider message for investors in the US high-tech giants. It is that successful and fashionable companies can stop their headlong run of growth and become, well, more like the rest of the global commercial pack. 

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

They will probably go on being successful, but they will have to prove their worth to a more sceptical investment community. 

The Netflix story is simple enough. It pioneered online streaming then used that position to generate wonderful content, including of course Bridgerton. 

But to justify its valuation it had to keep piling on subscribers. When that growth faltered, its share price collapsed. 

In November last year, its shares were worth $700 each. On Friday, the price was below $215. It is still a great company, worth $100billion (£75billion) – about the same as BP. But if you bought its shares last November you would be feeling a bit sore. 

Now think more widely about the high-tech giants. They are all different, but all play major parts in the daily lives of just about all of us. Apple, the most valuable of the lot, is currently worth $2.7trillion, well down from the $3trillion peak at the beginning of this year. That works out as a fall of more than 8 per cent. 

Its rival Microsoft is down nearly 16 per cent, Amazon by more than 12 per cent, Alphabet (parent of Google) by nearly 14 per cent, and Meta (parent of Facebook) a massive 43 per cent. Tesla, for all the hype about Elon Musk, is down 16 per cent so far. These are beefy declines, mitigated only slightly for UK and European investors by the climb in the dollar. 

So what has happened to the FTSE100 Index this year? On Friday, it closed at 7,522, actually a tiny bit up on its opening level of 7,505 on January 4. 

The decline in valuations of the US high-tech giants does not mean they will decline commercially. They may go on doing very well. It is just that a sensible valuation for Apple may be $2trillion, not $3trillion. The change is one of mood. 

What has led to that? Well, the obvious answer is that money is no longer free. The central banks have belatedly started to increase their interest rates, but the bond markets are way ahead of them. 

Last week, the ten-year gilt yield nudged above 2 per cent in inter-day trading, the highest since 2015. The US ten-year treasuries were trading just under 3 per cent. German government ten-year bonds were just under 1 per cent, the highest since 2014. That may not sound a lot but early last month the yield was negative. 

The sharpest example of the shift in market sentiment is what has happened to Spacs – special purpose acquisition companies. 

You may remember they were all the rage a year ago – companies floated mostly in New York to buy other companies, without disclosing what those companies might be. They have been dubbed ‘blank cheque’ companies, with some justification. Well, they are still around, and the number of Spac mergers or acquisitions peaked at 104 in the last quarter of 2021.

However, now they have fallen back to 66 in the first three months of this year. There are hundreds of Spacs that have failed to find anyone to buy or partner with. Regulation is being tightened and the boom is past. So if high-tech America is losing its lustre and frothy concepts such as Spacs are no longer fashionable, what do you do? Where is safety? 

There is no easy answer, except to say that the traditional safe haven of bonds is absolutely not the place to be. 

No one knows how fast the climb in bond yields will be and how far it will go. 

But since the price of bonds moves inversely to the yield, there is a near certainty that buyers will lose money. 

The most helpful thing to note is that on a very long view, global equities have produced a real return of about 5 per cent in the UK and 6 per cent in the US. 

There are scores of large enterprises around the world providing our daily needs and those with established brands should be able to increase their prices enough to fight their way through this surge in costs. 

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