No sooner have they digested the French elections than investors begin the earnings season. On the menu this quarter, sales are expected to rise by more than 7% for listed European companies. At Nestlé, for example, soaring prices on the shelf are boosting organic growth. But for its CEO, Mark Schneider, the time has come to be cautious: “it is no longer a question of “increasing margins, but of defending them, and passing on to consumers the most reasonable price increase possible”. Soaring raw material prices, soaring logistics costs, the first signs of a surge in salaries: all items of business expenditure are expected to rise this year. More than the dynamism of revenues, it is therefore the resilience of the operating margin that will make it possible to distinguish the wheat from the chaff, according to the publications. Combined with the rise in bond yields (the fastest in the last twenty years), this profitability criterion invites investors to stay away from overly high valuations. The quest for growth at any price in the 2020s and 2021s could therefore be replaced by an age of reason. It is hard to say whether this is just the prelude to the markets adapting to the risk of recession or the beginning of an era of great moderation in stock market valuations… But, in the meantime, Netflix’s 40% drop attests to the violence of these adjustments to reality. The video-on-demand giant, which now expects its subscriber base to shrink, talks about the increasingly competitive nature of its industry. What it fails to acknowledge is that in the UK, where inflation is in full swing, a record 1.5 million VOD subscriptions have just been cancelled.
British households who feel inflation biting into their purchasing power are starting to cut back on their spending by cutting back on their subscriptions. With an average of 15 subscriptions per household in the US, a large number of digital companies, seemingly immune to inflation, could also be suffering from this syndrome, which already has a name: subscription fatigue…
Thomas Planell, Portfolio manager – analyst at DNCA. This article was finalised in April 25th, 2022.
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