🗞 These 5 Companies Have All Doubled Their Gross Margins

Happy Sunday!

Here’s what’s on the docket for this week’s newsletter:

• 🔍 The World’s Most Selective Investor?

• 📈 5 Companies That Have Doubled Gross Margins

Let’s dive in!

Investor Spotlight: Dev Kantesaria

The World’s Most Selective Investor?

Kantesaria is one of the best performing investors of our time. Yet, most people have never heard of him, or his seemingly boring, multi-bagger investments.

Dev is the founder and managing partner of Valley Forge Capital Management where he has generated an estimated 15% annual return since 2007 for investors.

Kantesaria maintains a narrow “fishing pond” by having a robust elimination framework. If a business possesses certain qualities that Kantesaria doesn’t like, he’s more than happy to discard that company from his pool of potential investments.

Here’s a short list of the qualities Kantesaria tends to avoid:

1. High Capital Requirements

2. Highly competitive/minimal differentiation versus competitors

3. Early-stage industry without a proven winner

4. Speculation of a "turn-around" stock

5. A step change in the business model

Beyond this comprehensive elimination framework, Kantesaria isn’t afraid to hold just a few stocks at any given time either. In his words “Why own your 15th best idea?”

Instead, Kantesaria opts to own the small pool of companies that actually meet his strict criteria. In fact, Valley Forge’s top 5 positions account for more than 90% of the entire portfolio with each requiring very little capital investment in order to grow.

Kantesaria’s Best Investments:

1.) S&P Global

S&P Global is a credit ratings agency and financial data company that is deeply embedded in the financial world. Given the reputational advantage S&P possesses along with the digital nature of its business, S&P requires almost no capital expenditures in order to grow.

Kantesaria initially purchased shares in the after-math of the 2008 crisis likely around the $20 mark, making the stock a more than 25-bagger for Valley Forge.

2.) Intuit

Valley Forge initiated a position in software giant Intuit in 2016 near $100 per share. Today, the stock trades at more than $600 per share.

Intuit is home to several notable software brands such as Quickbooks, TurboTax, Credit Karma, and more. Across all of these business lines, high switching costs have culminated into strong pricing power for Intuit.

Additionally, while there are significant fixed costs required to build the platform, the incremental cost to service customers is quite low resulting in highly profitable growth as Intuit has scaled.

3.) Fair Isaac Corporation (FICO)

FICO is Valley Forge’s largest holding accounting for more than 30% of the portfolio.

Kantesaria began buying shares of the credit score monopoly in 2018 but has continuously added over the years.

As FICO has been able to raise prices in recent years, the company has seen a rapid increase in earnings thanks to the low variable cost nature of the business. In fact, since 2020, FICO has added $423 million in revenue while adding just $44 million in operating expenses. Talk about low-cost growth.

FICO has returned more than 1,000% since Valley Forge’s initial purchase.

Featured Content

5 Companies That Doubled Gross Margins Over 20 Years

Profit margin expansion, particularly gross profit margin expansion, is often a byproduct of improved competitive positioning for a company. The ability to command a greater percentage of the unit economics demonstrates the dependence a company has with its customers and suppliers.

1.) NVIDIA

Beyond general cost efficiencies that NVIDIA has cultivated over the years, recent AI-driven customer GPU demand has enabled the company to successfully raise prices while maintaining a relatively consistent cost of revenue.

Gross Margin:

• 2004: 32%

• 2024: 76%

2.) Broadcom

Broadcom owns a massive portfolio of semiconductor and infrastructure software products. In addition to production efficiencies, Broadcom has raised prices broadly across its product suite.

Gross Margin:

• 2005: 34%

• 2024: 75%

3.) Amazon

Amazon’s gross margin improvement has largely come from a shift in the overall business model. Amazon’s higher margin divisions like Cloud Computing, Advertising, and 3rd Party Seller Services now account for more than 50% of the company’s overall revenue which has helped push the gross margins up considerably.

Gross Margin:

• 2004: 23%

• 2024: 48%

4.) Spotify Technology

As Spotify’s user base has grown, its role in the music industry overall has become increasingly important. So much so that in 2017, the major music labels (Universal Music Group, Sony Music Entertainment, and Warner Music Group) were forced to renegotiate a higher percentage of the revenue that would be paid to the streaming giant. This drastically helped improve Spotify’s gross margins.

Gross Margin:

• 2015: 12%

• 2024: 29%

5.) Carvana

Online used car retailer Carvana has increased gross margins primarily through cost efficiencies gained from its distribution network. Its cost to acquire, recondition, and transport vehicles before resale have all dropped significantly as its continued to build out a robust logistical footprint.

Gross Margin:

• 2014: -0.5%

• 2024: 20%

Meme of the week

Entertainment giant Disney has seen its fair share of challenges over the last decade. From new streaming competition to executive turmoil, Disney shares have gone virtually nowhere over the last 10 years.

Well, on Monday of this week, Disney announced that it will be acquiring 70% of the sports streaming platform Fubo.

Fubo, which is home to ~1.9 million subscribers globally, has generated more than $2 billion in cumulative losses over the last 5 years. While Disney plans to combine its Hulu+ LiveTV service with the sports streaming app, it may fail to address some of Disney’s biggest challenges.

Shares of Disney were down 2% this week.