2025-04-12 22:01:29
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Today at a glance:
🏦 JPMorgan: Considerable Turbulence
📈 Blackrock: $11.6 Trillion in AUM
🛩️ Delta Airlines: Guidance Grounded
🍺 Constellation: Tariff Hangover
🌿 Tilray: Strategic Reset
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JPMorgan Chase reported revenue growth of 8% to $45.3 billion ($1.8 billion beat) and EPS of $5.07 ($0.43 beat), including a $0.16 gain from its First Republic acquisition. Net interest income (NII) reached $23.3 billion, and the bank raised its full-year NII forecast by $0.5 billion to $94.5 billion. Results were driven by record equity trading revenue (+48% Y/Y to $3.8 billion) and strong investment banking fees performance (+12% to $2.2 billion), despite rising credit loss provisions to $3.3 billion as the bank braces for potential economic weakness.
CEO Jamie Dimon struck a cautious tone, warning of “considerable turbulence” ahead due to tariffs, sticky inflation, high fiscal deficits, and geopolitical uncertainty. JPMorgan maintained its expense outlook and emphasized liquidity and capital strength as it prepares for a wide range of scenarios. While consumers remain resilient for now, the bank sees growing signs of caution from corporate clients, with many pulling back on investment and dealmaking activity.
BlackRock saw revenue grow 12% to $5.3 billion ($30 million miss), and EPS was $11.30 ($1.09 beat). Assets under management reached a record $11.6 trillion (up 11% Y/Y), driven by $84 billion in net inflows, led by ETFs, fixed income, and private markets. Despite market volatility and institutional index outflows, the firm posted 6% organic base fee growth, its strongest start to a year since 2021.
Private markets and ETFs remained key growth drivers, while technology services and subscription revenue rose 16% year-over-year, supported by the Preqin acquisition and continued demand for Aladdin, BlackRock’s portfolio risk management platform used by institutions globally. CEO Larry Fink noted that market anxiety and policy uncertainty are dominating client conversations but reaffirmed long-term demand for infrastructure and private credit. BlackRock continues to reposition itself beyond traditional asset management—deepening its presence in alternatives, technology, and global markets.
2025-04-11 20:03:17
Welcome to the Free edition of How They Make Money.
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Being an optimist is a superpower.
That's even more true during weeks like these.
🐻 The Nasdaq briefly entered bear market territory—over 20% off its peak.
Headlines are flashing red. Portfolios are shrinking fast. Panic sets in.
In the thick of it, keeping a cool head feels impossible.
The best days often come right after the worst, testing our emotions.
This guide is your antidote to the chaos.
Let’s break it down—with data, strategy, and a steady hand.
Today at a glance:
📉 What is a bear market?
📊 What history tells us
🧠 The psychology of downturns
🏗️ How to stay invested
🔍 How to find opportunities
✅ Key takeaways for investors
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A bear market is typically defined as a drop of 20% or more from recent highs in a major stock index—like the S&P 500 or Nasdaq.
It’s more than a number—it’s a psychological turning point
We’ve seen it before.
Since 1945, the S&P 500 has experienced 15 bear markets:
📉 Average decline: -32%
⏳ Time to bottom: ~11 months
📈 Time to recover: ~1.7 years
These numbers vary—but the pattern is familiar.
Markets fall. Investors panic. Recovery follows.
If we are in an average bear market, we’ll reach a bottom early next year and won’t hit a new high until the end of 2026.
Sounds daunting? Not with the right mindset. If you’re a net buyer of stocks, it’s your chance to scoop up great companies on sale. Shelby Cullom Davis explained:
“You make most of your money in a bear market; you just don’t realize it at the time.”
The key is understanding that bear markets are normal.
So the real question isn’t if they’ll happen again.
It’s how you’ll respond when they do.
Here is the historical frequency of drawdowns identified since 1928:
Most bear markets feel endless in the moment.
But in hindsight, they were temporary setbacks on a long upward trend.
Yes, there have been outliers:
1973–74, when inflation raged.
2000, the dot-com bubble.
2008, the Great Recession.
Each took 4+ years to recover. But they were also rare.
In 12 out of the 15 bear markets since 1945, investors broke even in under 3 years.
📈 More importantly, rebounds tend to begin before things feel safe.
Peter Lynch once said:
“Every economic recovery since WWII has been preceded by a stock market rally. And these rallies often start when conditions are grim.”
Trying to wait for perfect conditions means missing the early gains.
That’s why staying invested—even when it’s hard—is usually the smarter move.
One of the great ironies of investing: stocks are the only thing people hate to buy when they go on sale.
Volatility is the price of admission for better returns.
Morgan Housel calls it “a feature, not a bug.”
When prices fall, there’s always something to worry about.
Global pandemics. Recessions. Trade wars. Inflation. You name it.
The fear of a potential recession will make headlines for the foreseeable future. Critically, perma bears will claim that the world order has changed and stocks may never recover. The catch? They always say this.
In his book Beating the Street, Peter Lynch explained:
“This one is different,” is the doomsayer's litany, and, in fact, every recession is different, but that doesn't mean it's going to ruin us."
On average:
📉 Recessions last 11 months.
📈 Expansions last nearly 6 years.
The takeaway? Why spend all your time preparing for recessions—when they’re brief, unpredictable, and often already priced in?
Even with perfect knowledge of the economy, you wouldn’t be able to consistently time your trades. The market tends to rebound long before the economic news improves.
Despite knowing this, investors still try to outsmart the cycle.
But as history shows, market timing is a weapon of alpha destruction.
The better strategy? Stay in the game. Let time and patience do the heavy lifting.
And yet… the S&P 500 has returned ~10% annually, including dividends, for nearly a century.
That’s the hard part of long-term investing.
You must stay optimistic in a world that constantly tells you not to be.
📌 Bottom line: Bear markets are part of the cycle—and history shows that patient investors are often rewarded.
It’s not the math—it’s the mind games.
Markets fall all the time. But a bear market? That’s when it feels personal.
🔻 Your portfolio shrinks.
🔻 The headlines get darker.
🔻 Every bounce feels fleeting.
You don’t know how bad it’ll get. Or how long it’ll last.
The real pain isn’t the drop—it’s the uncertainty.
Here’s why:
🔮 We extrapolate. A 20% drop feels like it’s heading to 50%.
🕰️ We feel the need to act—even if doing nothing is smarter.
🧠 Our brains crave patterns—but markets rarely tell a clear story.
📉 We confuse volatility with a permanent loss of capital.
This is when good investors make bad decisions:
Selling too soon.
Freezing and hoarding cash.
Chasing safety after the market already plunged.
📉 Most underperformance doesn’t come from picking the wrong stocks.
It comes from reacting poorly when fear takes over.
When the emotional fog rolls in, your best defense isn’t timing the market.
It’s having a plan—and sticking to it.
When prices fall, discipline—not prediction—is your superpower.
You don’t need to time the bottom.
You need a system you can stick to in the worst moments.
Here comes the obligatory Lynch quote:
“The most important organ in investing is not the brain, it's the stomach.”
Volatility isn’t a reason to abandon ship. It’s a reason to lean into a process that removes guesswork.
✍️ Journaling and documenting can help you spot patterns in your behavior and past investments—and prevent knee-jerk reactions.
🗓️ Automating your strategy gives you a playbook when emotions run high. For example, you can define when you can buy and sell.
In short, asking, “What did I plan to do in this situation?” is often more effective than reacting in the moment.
In a meltdown, discipline beats brilliance.
Over the years, I’ve found that having a simple rule-based system helps me stay grounded. Here are the 4 rules I follow to protect my portfolio:
I invest a fixed amount monthly — rain or shine.
I don’t add to losers — keeping them relatively small.
I don’t sell winners — staying the course and being patient.
I invest for at least 5 years — to give compounding time to work.
Each month, I review fundamentals and valuations to decide what to buy—but when and how much is already pre-set. I also follow a strict maximum amount I’m allowed to add to a single investment.
Why this works for me:
✅ It caps how much I can put into any single stock.
✅ It forces me to invest even when panic is in the air.
✅ It spreads out my risk over time, avoiding the “all-in” trap.
✅ Most importantly—it keeps me invested through thick and thin.
It’s not the only way to invest. But it’s a system that works for me—and one you can adapt to make your own. And having a personal playbook like this can be the difference between reaction and resilience.
A structured approach can help avoid emotional overreaction. It doesn't matter what exact number you use. What matters is to define a plan and stick to it. In investing, consistency wins the game.
Before making any changes to your portfolio, write it down.
Why do you invest?
What is your time horizon?
What is your investment philosophy?
Why are you bullish about this investment?
Is there something that would break your thesis?
Success comes with homework and preparation. These are not questions you want to answer after the fact.
Adam Smith puts it perfectly in The Money Game:
“If you don’t know who you are, the stock market is an expensive place to find out.”
Keeping a simple investment journal (even using a simple note app) can help you recognize patterns, curb impulsive trades, and stick to your principles.
Feel like you must act after a red day? Pause.
If your decision can’t wait 24 hours, it’s probably driven by fear or greed—not fundamentals. To quote Lynch one more time:
“The trick is not to trust your gut feelings, but to discipline yourself to ignore them.”
Every bear market plants the seeds of the next bull run.
The question is—will you be ready?
This is when great businesses go on sale. Emotions rise. Prices drop.
And that’s when long-term investors quietly do their best work.
🧠 Start with quality. Focus on companies with strong fundamentals—healthy unit economics, expanding free cash flow, and durable moats. These are the businesses that can thrive, not just survive.
📉 Don’t rush in. Deploying capital gradually—especially during volatile stretches—can help you avoid catching a falling knife. You can invest more as markets fall further, not all at once. Use the regret-minimization framework.
🧾 Revisit your watchlist. The stocks you wished you owned at lower prices? They're back. Look for businesses that are still executing, gaining share, or investing through the downturn.
🔎 Focus on long-term payoff. Channel the power law (or 80/20 rule): Aim for the rare few companies that could outperform everything else in your portfolio combined. All stocks are cheap in a bear market, so it’s a great time to invest in companies that tend to be overpriced in a bull market.
🧱 Build your positions slowly. Bear markets often come in waves. That means you’ll likely have more than one good entry point. Create a rule-based approach (e.g., fixed monthly investing or valuation triggers) to stay consistent.
Bear markets test your conviction—but they also reward your preparation.
If you know what you’re looking for, this could be your moment.
A bear market feels like chaos.
But for long-term investors, it can be a gift in disguise.
The late Charlie Munger encapsulates it all in a single sentence:
“If you’re not willing to react with equanimity to a market price decline of 50% two or three times a century, you’re not fit to be a common shareholder.”
Survival isn’t about brilliance. It’s about behavior.
Here’s your survival checklist:
✅ Zoom out. Bear markets are temporary. History shows they happen every few years—and eventually give way to recoveries. The pain is short-term. The rewards are long-term.
✅ Stay calm. Market cycles are emotional roller coasters. But investing success comes from discipline, not reaction. You don’t need perfect timing—you need staying power.
✅ Have a plan. Whether you automate your investing, deploy cash gradually, or stick to monthly contributions, the key is to remove guesswork. Let the rules carry you in good and bad markets.
✅ Focus on resilience. Look for businesses that can endure and adapt—with strong balance sheets, loyal customers, and long growth runways. These are the companies that come out stronger on the other side.
✅ Buy selectively. When valuations compress, future returns expand. Bear markets offer rare chances to build positions in high-quality names—often at decades-low prices.
✅ Be patient. The best opportunities won’t feel obvious at first. But compounding happens quietly. What matters isn’t the next few months—it’s the next few years.
When others panic, staying grounded is your edge.
Bear markets don’t break great investors—they build them.
If this helped you stay calm, share it with someone who needs it today.
This too shall pass.
That’s it for today!
Stay healthy and invest on.
If thoughtful, long-term investing resonates with you, join App Economy Portfolio, our investing community, and get instant access to our curated stock portfolio.
Author's Note (Bertrand here 👋🏼): The views and opinions expressed in this newsletter are solely my own and should not be considered financial advice or the views of any other organization.
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2025-04-08 20:04:02
Welcome to the Premium edition of How They Make Money.
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📉The steepest US tariffs in a century just dropped—and markets are rattled.
The Trump administration has unleashed a sweeping new trade regime: a 10% tariff on all imports, with even higher rates for dozens of countries. The fallout is already visible—supply chains disrupted, inflation fears rising, and stocks sliding fast.
As Oaktree’s Howard Marks put it:
“The world economy was shook up like a snow globe.”
Policy uncertainty is now the biggest variable.
And it’s incredibly hard to forecast what happens next.
Apple has dropped 20% since the announcement. Stellantis halted production in Mexico. The Dow had its worst day since the pandemic crash. Meanwhile, gold hit a record, and Treasury yields tumbled as investors scrambled for safety.
So what do we do now?
This article is your guide through the noise to stay grounded.
Today at a glance:
📜 What just happened? The key facts behind the tariffs.
🌍 Why it matters. How tariffs ripple through the economy.
🔮 Why it’s hard to predict. The challenge of forecasting policy.
🏭 Who gets hit? Case studies of impacted companies.
🧘♂️ How to think long-term. Mindset > headlines.
✅ Key takeaways. Zooming out with clarity.
🧠 Investor lens. How to find opportunity in uncertainty.
America’s trade deficit has been growing for decades.
From a small surplus in the 1970s to a $1.2 trillion goods deficit in 2024, the US has become increasingly reliant on imports. This imbalance is now central to President Trump’s justification for sweeping tariffs—framing them as a way to “level the playing field.”
On April 2, Trump introduced the most aggressive US trade policy shift in decades:
A 10% universal tariff on all imports to the US.
Higher “reciprocal tariffs” on over 60 countries, calculated based on their trade surplus with the US.
China faces an additional 34% duty on top of the existing 20%.
Major partners hit include the EU, Japan, South Korea, Vietnam, and more.
Canada and Mexico are temporarily exempt from the reciprocal tariff list.
The Trump administration pitched the new tariffs as “reciprocal”—matching what other countries charge the US. But in practice, they’re not based on actual tariff schedules. Instead, the White House used a rough formula:
Trade deficit ÷ total exports × ½That means the new tariffs are based on how much a country exports to the US without importing in return—not the actual duties they impose. It’s more about punishing trade surpluses than matching trade rules.
👉 The administration argues the formula accounts for broader trade barriers, including non-tariff barriers like quotas, subsidies, and burdensome regulations. But critics say it oversimplifies—and risks escalating tensions based on vague or subjective measures.
The result? A hit list of top trade deficit partners. The tariffs disproportionately target countries where the US buys more than it sells—regardless of their actual import duties. As shown below, China and the European Union have the largest goods trade imbalances with the US, making them prime targets under the new formula.
📦 Hundreds of goods are affected, including electronics, autos, clothing, food, and luxury items like wine and watches.
🛑 Some sectors are spared—for now. Semiconductors, critical minerals, and pharmaceuticals were left off the initial list but flagged for possible future tariffs.
⏱️ Timing:
The 10% baseline tariff took effect at midnight on April 5.
Higher country-specific tariffs go into effect on April 9.
In response, China retaliated with its own 34% blanket tariff on US goods and restricted exports of several rare earth materials critical to tech and defense industries.
Other countries are weighing similar responses. The EU is reportedly considering targeted tariffs on US tech firms, while allies like Japan and Thailand have expressed “regret” and opened negotiations for exemptions.
These new tariffs touch everything—from prices at checkout to stock valuations.
Tariffs raise costs. US companies that rely on imports now face higher input prices. That includes retailers, automakers, apparel brands, and electronics giants. Many could pass those costs on to consumers, driving up prices on everyday goods—from phones and shoes to coffee and chocolate.
US importers, not foreign countries, typically foot the bill. Those costs often trickle down the chain, eventually landing with American households and small businesses. In effect, tariffs function like a hidden sales tax.
Low-income households will feel it most. Basic necessities make up a larger share of their budgets, and even small price increases hit harder. Analysts warn this is effectively a regressive tax.
Businesses are caught in limbo. With supply chains scrambled and margins under pressure, companies may pause hiring, delay investments, or cut costs. Some are already halting production.
Market confidence has cracked. The selloff isn’t just about economics—it’s about uncertainty. If these policies escalate or change on a whim, forecasting becomes nearly impossible.
In short: this is more than a trade story. It’s a macro shock—one that hits consumers, companies, and markets all at once.
The biggest challenge with these tariffs? No one knows what comes next.
As Howard Marks put it,
“We know much less today than usual. […] If you tell us what our own rules will be six months from now, I’ll bet you’re wrong.”
Trade policy has become fluid—almost improvisational. Tariffs are announced, amended, reversed, and negotiated in real time, often via social media or press conferences. That makes it nearly impossible for businesses—or investors—to plan with confidence.
Trump has already hinted that some tariffs may be rolled back in exchange for concessions, including on TikTok and fentanyl enforcement. Meanwhile, countries like China and the EU are launching swift retaliation, raising the stakes further.
On Monday, Trump threatened to impose an additional 50% tariff on China unless Beijing withdraws its 34% retaliation. He added that talks would be “terminated” if no deal is reached by April 8. Indexes dipped further on the news.
Just days earlier, he had a “very productive call” with Vietnam’s leadership—hinting that the newly announced 46% tariff could drop if a deal is reached. Apparel stocks like Nike and Lululemon have been a rollercoaster, swinging 5% or more based on the flavor of the day.
Even if tariffs are softened down the line, the damage to predictability is done. Companies may still delay hiring or investment, unsure whether the rules will stick. Markets aren’t just reacting to the policy—they’re reacting to the lack of clarity around it. And that can be even more destabilizing than the tariffs themselves.
This kind of volatility reinforces the point: policy is being made—and unmade—in real time.
Not all companies are affected equally. Businesses with global supply chains, heavy import reliance, or exposure to retaliatory tariffs are the first to feel the pressure.
Here are a few high-profile examples:
2025-04-04 20:03:21
Welcome to the Free edition of How They Make Money.
Over 200,000 subscribers turn to us for business and investment insights.
In case you missed it:
📣 Tariffs. Trade wars. Headlines are getting louder.
Markets are reacting—but should you?
With all the noise swirling, it’s easy to get distracted by the macro.
But investors who win over the long term focus on what really matters:
Company fundamentals.
💻 Software stocks can deliver explosive returns.
But not all growth is good growth.
Some companies scale quickly but burn through cash. Others print profits but stall out on expansion. As an investor, how do you know which ones are building something sustainable?
That’s where the Rule of 40 comes in. It’s a simple formula that blends revenue growth and profitability into a single, powerful signal. And it’s become one of the most widely used benchmarks for evaluating software companies.
This guide breaks it all down:
What the Rule of 40 is.
How it’s calculated.
Why it matters.
What pitfalls to avoid.
How to apply it across growth stages.
We’ll also look at three companies—GitLab, Palantir, and Salesforce—each at a different phase in the software lifecycle to see how the Rule of 40 plays out in the real world.
The Rule of 40 is a quick way to gauge the financial health of a software company—especially one prioritizing growth over near-term profit.
Here’s the formula:
Revenue Growth Rate (%) + Profit Margin (%) ≥ 40%If the combined number is above 40, the company is generally considered to be in good shape—balancing growth and profitability. If it’s below 40, it may be growing too inefficiently or not profitable enough to justify slower growth.
Profit margin can mean something different depending on the investor, sometimes excluding certain expenses or focusing on cash flow. More on this in a minute.
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The Rule of 40 was popularized by venture capitalist Brad Feld, who introduced it as a quick health check for SaaS businesses. Feld emphasized its value in balancing aggressive growth with disciplined financial management, helping investors quickly spot companies on sustainable trajectories.
Recent studies highlight its importance:
McKinsey & Company research found that only about one-third of software companies consistently hit this mark between 2011 and 2021.
Bain & Company said that even fewer (16%) sustain this performance for more than five years.
This reveals that achieving sustained growth combined with profitability is both challenging and valuable, offering significant insights for investors.
The Rule of 40 is a balancing act. It helps answer a critical question:
Is this company growing fast and efficiently enough to be worth the risk?
But here’s the catch: growth and profitability don’t weigh equally at every stage of a company’s life. A startup burning cash for growth might be perfectly healthy. A mature software giant doing the same? Not so much.
That’s why context matters.
A slowing, mature software business can generate exceptional returns to shareholders if margins expand significantly.
A company in hypergrowth with margins deep in the red might still pass the test.
The key is knowing what phase the company is in—and which lever it should be pulling. The Rule of 40 is less of a hard threshold and more of a diagnostic lens. It tells you if the company is striking the right tradeoff between expansion and discipline.
🧭 Use it to track evolution. A Rule of 40 score improving over time signals that a company is maturing well—scaling revenue while tightening operations. A declining score might suggest growth is slowing without profitability catching up, potentially indicating disruption.
In other words: Know the stage. Then, judge the balance.
The Rule of 40 is simple—but the inputs are critical. Not all revenue growth is equal, and not all profitability metrics are created the same. Here's what to prioritize:
ARR (Annual Recurring Revenue) and MRR (Monthly Recurring Revenue) are gold standards. They reflect subscription-based income that’s predictable and repeatable—ideal for evaluating SaaS businesses.
Total Revenue can work, too, especially for companies without pure subscription models. Just be mindful of one-time services, hardware sales, or lumpy contracts.
🔎 Tip: Not all revenue growth is equal. High-quality growth means recurring, high gross margin, and ideally driven by upsell and cross-sell—leading to high dollar-based retention.
Free Cash Flow margin is often favored. It shows how much actual cash the business is generating after capital expenditures.
Adjusted EBITDA margin is common in public filings—but be careful. It often excludes some expenses arbitrarily and is also called “bullsh*t earnings” by the late Charlie Munger.
Operating margin (GAAP basis) includes all operating expenses and can be compared between peers. However, it can occasionally include some non-recurring items that pollute the analysis (such as restructuring costs or impairment), so it’s not perfect.
Be consistent—and watch for aggressive adjustments.
SBC (stock-based compensation) is particularly important to call out. It’s how software companies attract and retain talent—and often makes up 20%+ of revenue. Excluding it can paint a flattering (and misleading) picture. Most management teams remove SBC in the adjusted metrics. And since SBC is a non-cash expense, it’s excluded from all cash flow metrics.
🔎 Tip: I focus on GAAP operating profit (non-adjusted) for this reason. It creates a level playing field by including SBC—and reflects the true cost of running the business, without investment gains/losses or interest polluting the analysis..
And yes, our visuals present the income statement on a GAAP basis.
You’re welcome.
The rise of AI software is transforming the growth profile of SaaS companies—but not always in obvious ways.
AI can boost revenue growth through premium features, usage-based pricing, and new customer segments. But it also introduces cost pressures, such as AI talent and expensive infrastructure for model training and inference.
That’s why the Rule of 40 is more relevant than ever. It helps investors see through the hype and ask the right questions:
Are margins improving or worsening as AI adoption grows?
Can a company turn early AI traction into sustainable growth?
In the AI era, fast growth alone isn’t enough. The Rule of 40 keeps companies honest.
Not all Rule of 40 scores mean the same thing. Here’s how it plays out across the software lifecycle, using three real-world examples:
Still prioritizing growth
In Q4 FY25 (January quarter):
Revenue Growth: 29% Y/Y, with Subscription revenue growing of 31% Y/Y and representing 88% of the top line. Another strong KPI here is the current RPO (next-12-month obligations from existing contracts), rising 35% Y/Y, implying a potential growth acceleration.
Profitability: Free Cash Flow margin of 16% in the past 12 months, and operating loss margin of -7% in Q4 (improving by 14 percentage points Y/Y).
Rule of 40 Score: 45+ if you focus on FCF, or ~22 if you focus on operating margin.
GitLab is investing aggressively in products (like Duo AI) and go-to-market, especially in the enterprise category. The company is showing exceptional operating leverage, indicating that it’s well on its way to being a high performer on the Rule of 40, even on a GAAP basis.
🔍 Watch for:
Margin expansion as GitLab Dedicated (single tenant SaaS solution) scales.
Upsell and cross-sell traction with enterprise clients.
Progress toward the Rule of 40 over time.
📌 For early-stage companies like GitLab, Rule of 40 is a target—not a requirement.
Balancing scale and margins
In Q4 FY24 (December quarter):
Revenue Growth: 36% Y/Y.
Profitability: Free Cash Flow margin of 44% in the past 12 months, and operating margin of 1% in Q4 and 11% in FY24.
Rule of 40 Score: 80 if you focus on FCF, or 47 if you focus on operating margin in the past year.
Palantir is in a sweet spot. It’s monetizing explosive demand for AI while maintaining impressive profitability. The company was added to the S&P 500 in 2024 after being profitable for four consecutive quarters. The US commercial business is booming, and margins are expanding as deals scale.
🔍 Watch for:
European adoption catching up.
Whether margins hold as growth decelerates.
Continued momentum in commercial bookings.
📌 Mid-stage companies must sustain strong Rule of 40 scores by showing durable growth while improving margins as they scale.
Margin-heavy, growth-light
In Q4 FY25 (January quarter):
Revenue Growth: 8% Y/Y.
Profitability: Free Cash Flow margin of 33% in the past 12 months, and operating margin of 18% in Q4 and 19% in FY25.
Rule of 40 Score: 41 if you focus on FCF, or 27 if you focus on operating margin in the past year.
Salesforce is a classic mature SaaS business. It’s navigating single-digit growth, but strong cash flows and operational efficiency give it an excellent score on the Rule of 40. AI products like Agentforce offer optionality but haven’t yet bent the curve.
🔍 Watch for:
Reacceleration in top-line growth.
Expansion in RPO (future revenue visibility).
Margin stability during its current leadership transitions.
📌 Mature companies must lean on efficiency—or reignite growth—to stay in Rule of 40 shape.
The Rule of 40 is a universal framework—but your interpretation should shift based on where the company is in its journey:
Early-stage: Prioritize growth trajectory and margin potential.
Mid-stage: Look for efficient scaling and durable growth.
Mature: Watch for new initiatives and margin discipline.
Improving a Rule of 40 score means either growing faster, becoming more profitable, or both. The best software companies pull multiple levers at once. Here are a few common strategies:
Expand Net Revenue Retention (NRR): Upselling existing customers is often more efficient than acquiring new ones. Strong NRR fuels growth without hurting margins.
Improve sales efficiency: Lowering Customer Acquisition Cost (CAC) or accelerating payback time boosts profitability and operating leverage.
Embrace product-led growth: Letting the product drive adoption can reduce marketing spend and improve margins.
Optimize gross margin: Infrastructure savings, automation, and scaling support costs can lift profitability—even with flat growth.
Monetize innovation: New features, pricing tiers, or usage-based models can increase revenue per customer while protecting margins.
Ultimately, the companies that shine long-term are those that scale efficiently—adding revenue faster than they add cost.
The Rule of 40 is one of the simplest—and most powerful—ways to assess a software company’s financial health. By blending growth and profitability into a single score, it cuts through the noise and helps investors focus on what really matters: sustainable, long-term value creation.
But it’s not a magic number. It’s a lens.
Used thoughtfully, the Rule of 40 can help you:
Screen for quality: High scores reflect strong growth, operational efficiency—or both.
Understand tradeoffs: Low scores aren’t always bad for early-stage disruptors. High scores aren’t always sustainable.
Track evolution: A rising score often signals maturing operations. A falling one might point to decelerating growth or margin compression.
Pair with context: Leadership, product strength, competitive moat—those intangibles still matter.
Here’s a quick snapshot of its strengths and limitations:
✅ Simple and intuitive: Easy to calculate, easy to compare
✅ Highlights sustainability: Balances two key financial forces
✅ Widely adopted: Trusted by VCs, public investors, and operators
❌ SaaS-specific: Less useful outside recurring revenue models
❌ Can be gamed: Especially with adjusted earnings or SBC exclusions
❌ Ignores intangibles: Doesn’t capture brand, moat, or leadership quality
Bottom line: The Rule of 40 is a great starting point—but not the full story.
That’s it for today!
Stay healthy and invest on.
Disclosure: I own CRM, GTLB, and PLTR in App Economy Portfolio, our investing service, where we identify and accumulate shares of exceptional software companies—from fast-growing disruptors to proven cash machines.
If thoughtful, long-term investing resonates with you, join our investing community and get instant access to our curated stock portfolio.
Author's Note (Bertrand here 👋🏼): The views and opinions expressed in this newsletter are solely my own and should not be considered financial advice or the views of any other organization.
2025-04-01 20:03:10
Welcome to the Premium edition of How They Make Money.
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🚙 Auto: NIO, Stellantis.
🌯 Franchises: Darden.
👔 Consulting: Accenture.
🩺 HealthCare: HealthEquity.
🥫 FMCG: Celsius, General Mills.
📱 Gaming: Sea Limited, Tencent.
😎 Tourism: Carnival, Vail Resorts.
📦 E-commerce: Pinduoduo, JD.com.
🛒 Retail: Best Buy, Costco, JD, Target.
☁️ Productivity: Asana, DocuSign, GitLab.
📈 New IPOs: CoreWeave, Klarna, StubHub.
🎽 Apparel: Nike, On, Lululemon, Birkenstock.
💼 Enterprise Software: Adobe, Oracle, UiPath.
⚙️ Semis: Broadcom, Micron, Marvell, Synopsys.
🛡️ Security: CrowdStrike, Okta, SentinelOne, Zscaler.
📊 Data & Infrastructure: HPE, MongoDB, Rubrik, Samsara.
And more, like Veeva, StoneCo, C3.ai, Chewy, FedEx, and GameStop.
2025-03-29 22:01:57
Welcome to the Saturday PRO edition of How They Make Money.
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Today at a glance:
🧘🏻 Lululemon: Soft Outlook
🐶 Chewy: Autoship Unleashed
🎮 GameStop: Bitcoin To The Rescue
Lululemon closed FY24 with a 13% jump in Q4 revenue to $3.6 billion ($30 million beat) and EPS of $6.14 ($0.27 beat). Gross margin expanded 100 basis points to 60%. International revenue surged 38% Y/Y, much faster than the 7% Y/Y in the Americas. Comparable sales up 3%—driven by 20% growth abroad, including 27% in mainland China. Meanwhile, sales in the Americas were flat. The company ended the quarter with 767 stores, adding 18 net new locations.
However, the FY25 outlook disappointed, with revenue growth projected at just 5%–7% Y/Y and EPS of $14.95–$15.15—both below Wall Street expectations. Management cited cautious consumer behavior, inflation concerns, and rising tariffs as headwinds. North America sales are expected to grow in the low- to mid-single digits, while international expansion remains a key focus—especially in China, where 40 to 45 new stores are planned. Despite near-term pressure, product innovation and global growth continue to support the brand’s long-term ambitions. Lululemon also repurchased $332 million in stock during the quarter, bringing FY24 buybacks to $1.6 billion (+192% Y/Y), signaling management’s confidence in the current valuation.