For many fund managers who worked through the dotcom bubble of the late 1990s – and particularly those with a quality growth mindset – the experience was enough to put them off the tech sector for the rest of their careers.
Yet for Michael Crawford (pictured), manager of the TB Chawton Global Equity Income fund, one of the key lessons he took away from this period has led him to back one of the most maligned of the current crop of tech giants: Netflix.
While Netflix is highly valued by its customers, who have access to thousands of hours of films and television shows for a relatively small monthly fee, the investment case for the $300bn (£223bn) company is more nuanced.
Technology makes up about 65% of Stephen Yiu’s Blue Whale Growth fund, yet he warned part of this sector is in a “mini bubble”, pointing to Netflix as an example of a “low quality” company on a high valuation.
George Viney also holds tech stocks such as Facebook, Microsoft and Google in his Trojan Global Equity fund, yet he has steered clear of Netflix, citing concerns over its debt.
However, Crawford has taken a different view.
“If you actually work through the numbers, even if it only gets to 350 million subscribers in five years from 200 million today, then brings the prices up, as at the moment they're quite underpriced,” he said, “then you work back to what the content budget will be, even though it is absolutely massive, it can still be highly profitable.”
The main reason why the manager is so optimistic is the quality of the underlying product, which he said is being underestimated by the market. In this way, he likened Netflix to BSkyB, now Sky, which he bought when it launched.
One of the defining moments for BSkyB came when it bought the broadcast rights for the first five seasons of the Premier League, beginning in 1992, for £304m. Crawford said the general feeling at the time was that Sky had overpaid, but it quickly became apparent it had netted a bargain.
This May, the Premier League extended a three-year contract to broadcast its matches for the sum of £5.1bn.
“I see the same pattern with Netflix in the sense that it is investing heavily to grow its business and it sees the value in its content, which in this case is quality drama,” Crawford continued.
“Just look at the way it has internationalised it, with the likes of Squid Game, which has become a global phenomenon.”
Sky now has its own streaming service, Now TV, which makes it a competitor of Netflix, and it is not alone here, with Disney and tech giants Amazon and Apple also muscling in on the space. This competition is one of the reasons many fund managers remain wary of investing in Netflix. However, Crawford claimed it is in a different class to its peers.
“I just don't think any of the other players apart from maybe Disney will be able to compete with its content budget,” he said.
“The other thing about Netflix is it has this unique culture where it hires the best talent it possibly can and gives them creative freedom. It's going to be difficult for Amazon or Apple to do that, and it’s not going to be replicated easily by Disney.”
Crawford has spoken to Trustnet in the past about how he would be unlikely to sell out of a stock just because it looked expensive. The manager factors 10 to 20 years of growth expectations into his models, and tries to think like a business owner, adding: “If you are a holding company, you don’t go around every quarter valuing all of your subsidiaries and selling some because they appear a little expensive.”
However, he is not completely blind to valuations and said that sometimes these can become so extreme, he has no choice but to sell – turning once again to Sky as an example.
“My claim to fame came in the tech bubble, which Sky got caught up in,” he added. “I can't remember what the market cap was, but we reverse engineered it and worked out it would have to sell a subscription to virtually the whole world to justify its share price, yet it only operated in the UK. We sold at that point.”
Data from FE Analytics shows TB Chawton Global Equity Income has made 49% since launch in May 2019, compared with 50.1% from the MSCI World index and 28.7% from its IA Global Equity Income sector.
Performance of fund vs sector and index since launch
Source: FE Analytics
The £14.3m fund has ongoing charges of 1.18% and is yielding 1.8%.