View Online | Sign Up | Advertiseβ
Friends,
If we were forced to pick our favorite business metric, it would be gross margin.
If you run a lemonade stand, your gross profit would be your total sales minus what it costs you to buy the lemons, sugar, cups, and water. Your gross margin would express gross profit as a percentage of sales.
A steady or expanding gross margin is a great sign for investors. It signals that a business has at least one of these three positive attributes working in its favor:
As a general 'rule', a steady or rising gross margin is a positive signal. Conversely, a falling gross margin is a negative signal. The latter usually suggests that a business is facing trouble in the marketplace.
And yet -- as with all things in investing -- there are exceptions to every 'rule'.
Take the case of Axon Enterprise -- which makes both TASER stun guns and Axon body cameras for first responders. Back in 2018, the body camera division was starting to take off. Axon offered them to every police officer in the country for one year -- free of charge.
It was a brilliant move. Once police officers started using the body camera, they also had to use Axon's Evidence.com cloud-based software product. Evidence.com takes the video footage and stores, organizes, and analyzes it. Once departments start using the body cameras and Evidence.com, it becomes a huge pain to switch to a different provider.
But giving away the cameras for free came at a price: Axon's gross margins quickly fell 550 basis points to 55.1%. For context, outside of the pandemic, Axon hasn't had such low gross margins for over a decade.
The funny thing is that -- for the next year -- lower gross margins were a good thing. It meant more and more departments took Axon up on the free offer -- and locked themselves into Axon's ecosystem as long-term customers.
In essence, Axon was trading short-term profits for long-term market dominance.
This move has worked out brilliantly for Axon's investors. The stock is up 700% since management made that bold decision.
We bring this up to highlight that every investing "rule" has its exceptions. Normally, a falling gross margin signals a company is in trouble. In this case, it signaled that the company was going on the offensive.
If you invest, it's incredibly important to understand the "rules" of investing. Once you've mastered them, the next step is to learn when it's okay for businesses to break them.
Wishing you investing success,
- Brian Feroldi, Brian Stoffel, & Brian Withers
Together with Convertkit:
Sponsor this Newsletter
Guess what? You're reading promotional content in a newsletter. Sponsoring influencer newsletters, like mine, is a great way to reach engaged and targeted audiences. It will build your brand β whether that is your personal brand or your business.
The Long Term Mindset newsletter is part of the ConvertKit Sponsor Network. This network connects businesses to audiences of newsletter readers. For example, you can sponsor Long Term Mindset and connect with about ~80,000 people with similar interests to yours.
βApply to Be a Sponsorβ
One Simple Graphic:
One Piece of Timeless Content:
We've been a fan of Tim Ferriss since he published The 4-Hour Workweek in 2007. Several years ago, Tim made a simple but radical decision that saved him hundreds of hours a year. Discover how one decision can save you hundreds of decisions.
One Thread:
We're big fans of Nathan Barry, the founder and CEO of Convertkit. In this timeless thread, Nathan shares some personal finance gems:
|
One Resource:
It's no secret that we love visuals. If you like them too, check out this Finance Cheat Sheet by Nicolas Boucher. It's one of the highest-quality finance visuals we've ever seen.
One Quote:
More From Us:
π¨βπ NEW! We're launching a brand new course -- Advanced Financial Statement Analysis -- in October! See the details and join the waitlist.β
π If you've read Brian Feroldi's book, he'd love a review.
π¨βπ Need help getting your personal finances in order? Click here to startβ our 5-day Financial Wellness email course. It's completely free.
I teach investors how to analyze businesses. Each Wednesday, I share six pieces of timeless content that can be read in less than 2 minutes. Read by 100,000+ investors from a16z, Amazon, Google, Microsoft, and more.
View Online | Sign Up | Advertise Welcome to Long-Term Mindset, the Wednesday newsletter that helps you invest better. Today's Issue Read Time: <2 minutes Lesson: The importance of valuation Timeless Content: Morgan Housel and Howard Marks talk debt Thread: Understanding margin of safety Resource: A free summary of Warren Buffett's investing lessons And more! Learn how to value companies like the pros: Warren Buffett. Peter Lynch. Terry Smith. Stanley Druckenmiller. All of these legends know...
View Online | Sign Up | Advertise Welcome to Long-Term Mindset, the Wednesday newsletter that helps you invest better. Today's Issue Read Time: <2 minutes Lesson: Why hindsight bias can distort our views of reality Timeless Content: The September effect, explained Thread: How to review earnings Resource: A free ebook on DCF modeling And more! Together with Finchat Brian Feroldi using Finchat I (Feroldi here) am a huge fan of visuals. A good chart can relay information 10x faster than numbers...
View Online | Sign Up | Advertise Welcome to Long-Term Mindset, the Wednesday newsletter that helps you invest better. Today's Issue Read Time: <2 minutes Lesson: An investing lesson from...Happy Gilmore? Timeless Content: Our favorite style of "FIRE" Thread: Accounting explained simply Resource: Visualize the S&P 500 And more! Sponsored by: Shortform Elevate Your Nonfiction Reading I (Feroldi here) have learned more from reading books than any other medium. However, books require a...