Why All Drawdowns are Not Equal

Data Centers: The massive buildings filled with servers that power cloud computing and AI. Marvell's chips handle the networking, storage, and specialized tasks needed to move and process huge amounts of data.

5G Networks: The technology that makes super fast wireless communication possible. Marvell provides the chips that go into the equipment used by telecom companies to build out their 5G networks.

Automotive: As cars become more like computers on wheels, they need advanced networking and data processing. Marvell's technology is used in these vehicles to support features like advanced driver-assistance systems.

Marvell clarifies that Amazon is exclusively selecting it for the next generation of XPUs.

Marvell clarifies that the XPU orders from Microsoft and Meta are on track and gives definitive guidance about the potential size of these contracts.

Winning new clients.

Weak competitive moat: Broadcom dominates the specialized GPU (XPU) market with over 80% market share. It's difficult to see a clear competitive advantage that would allow Marvell to take share from Broadcom or defend its position against new entrants like MediaTek..

High Competition to lead to poor profitability: Due to a lack of differentiation between Marvell and MediaTek, large customers like Amazon, Microsoft, and Meta will be able to bargain hard with Marvell, leading to very poor profitability.

Any AI spending pullback can lead to Marvell’s AI revenues collapsing: In a downturn, large customers may cancel orders from Marvell, leading to an overnight collapse in the valuation.

Direct-to-Consumer Model: Unlike many apparel brands that rely on wholesale partners, Lululemon sells directly to its customers through its own retail stores and e-commerce platform. This approach gives them complete control over the brand experience, pricing, and inventory, and allows them to build a stronger relationship with their customers.

Community-Based Marketing: Lululemon's strategy goes beyond traditional advertising. They foster a sense of community by hosting in-store yoga classes, fitness events, and building relationships with local brand ambassadors. This approach turns their stores into community hubs and their customers into loyal brand advocates.

Aspirational Lifestyle Brand: Lululemon does not just sell workout gear; it sells a healthy and active lifestyle. By associating their products with yoga, mindfulness, and well-being, they have successfully positioned themselves as a premium lifestyle brand. This allows them to expand into everyday wear and command higher prices than competitors.

Slowing U.S. Sales: The core of the issue is a significant slowdown in sales growth in its biggest market, North America. Management has acknowledged this, and a drop in U.S. store traffic has been a major concern for investors.

Tariff Headwinds: The company has been impacted by rising import tariffs, which are squeezing its profit margins. This has led Lululemon to lower its financial outlook for the year, and analysts are worried about the ongoing pressure on profitability.

Increased Competition: While Lululemon remains a leader, it's facing more intense competition from both new and established athletic apparel brands.

U.S. Sales Turnaround: Evidence that the company has reversed the recent slowdown and is seeing renewed growth in its core North American market.

Strong International Growth: Continued, robust expansion in key international markets, especially China, to offset U.S. weakness and prove the global growth story.

Successful New Products: Positive performance and profitability from newer categories like footwear and men's apparel, showing that the company can successfully diversify its business.

Difficult to gauge brand perception: It is difficult to determine if the Lululemon brand is still relevant. The recent drop in U.S. sales could be due to weakening consumer sentiment, a loss of brand relevance, increased competition, or a combination of these factors. Because the exact cause of the sales decline is unclear, we are not able to model and value the company.

International Growth can not compensate for weakness in USA: The international business outside of US is ~40% of Lululemon’s total revenue. If the weakness in the US is not resolved, growth in the international markets will not be able to push overall revenue growth to >10%, which is what we will generally look for.

No end in sight to trade war: Lululemon’s profitability will continue to be affected.

Figma Design: The core product, a collaborative tool for creating user interfaces, prototypes, and other graphic designs.

FigJam: A separate online whiteboard for brainstorming, workshops, and team ideation.

The Freemium Hook: Anyone can start using Figma for free, which allows individual users to get familiar with the product and introduce it to their company.

The Collaboration Moat: Real-time collaboration is Figma's core strength. This creates a powerful network effect where one person's use of the tool naturally encourages others to join, making it indispensable for the entire team.

Valuation Correction: At its peak, Figma was trading at a massive 65-70x price-to-sales (P/S) multiple. This valuation was based on expectations of flawless, high growth for years to come. The stock has since corrected to a more grounded multiple, currently trading around 25-30x sales. The initial over valuation was the primary reason for the stock’s drawdown.

Slowing Revenue Growth: For a company with a high valuation, consistent hyper-growth is essential. Figma's revenue growth, while still strong, has shown a clear deceleration. In the first half of 2025, revenue growth was 46% and 41% year-over-year in Q1 and Q2, respectively. However, management's guidance for the third quarter was a slower 33%, and full-year guidance pointed to a further slowdown to 37%. This downtick in the growth rate spooked investors who were expecting growth to stay at higher levels.

Reacceleration in Growth Rate: The revenue growth was to materially pick up from the current guidance of 33% YoY growth for the stock to rebound from the current steep valuation of ~25x (P/S) multiple.

Release of New Products: Any new AI native product releases that have a large TAM and that ease the market’s apprehensions about AI, reducing the need for professional design software.

Nose Bleed Valuation: While Figma has a solid business model and a long growth runway, its valuation is a major concern. It's trading at roughly 25x its price-to-sales multiple, significantly higher than the typical 4x to 12x for most software companies. This valuation already prices in many years of future growth, placing the stock far above its intrinsic value. We'd consider buying at a more reasonable 10x to 15x price-to-sales multiple.

Rule 1: Don’t lose money

Rule 2: Remember Rule 1

Poor financial performance: A stock's drawdown is likely justified if its key performance indicators (KPIs) are deteriorating. It's best to stay on the sidelines unless those KPIs stabilize or improve.

Negative news like financial irregularity or scandal: if there are accounting irregularities or a corporate governance scandal, it is best to let such opportunities pass. It is very difficult for such stocks to recover due to the reputational harm that follows.

Excessive Leverage or Debt: If the business is over-leveraged, then the whole equity can get wiped out. Best to avoid stocks where the drawdown is due to debt or other large balance sheet liabilities.

High starting valuations: Many stocks have a solid underlying business, but the starting valuations were high, and the market is correcting that excess. In such scenarios, we must wait till the company becomes fairly valued or cheap.

Slowing growth: Sometimes, the market over-penalizes companies that grow a little slower than the market’s expectation. Many times, this slowing growth is a short-term phenomenon, and the business is expected to deliver robust growth in the longer term. These are some of the best opportunities for rebound investing.

Expectation of a negative catalyst in the short term: Many market participants may decide to skip investing in a particular opportunity, no matter how attractive, if there is a major negative catalyst upcoming. For e.g. Google’s stock spent many months below $200/share, till the results of its court case were released. As soon as the negative catalyst was over, the stock quickly touched all-time highs.

Cyclical businesses at a cyclical trough: Cyclical businesses go through periods of bad earnings and then a period where they make good profits. This cycle keeps repeating itself. At cyclical troughs, the market is likely to overreact to poor earnings from a company and present a great investment opportunity to investors.

Management changes: When a stock sells off because a single leader leaves, the drawdown is often an issue of sentiment, not fundamentals. A company is a system of rules and procedures, so it can often continue to succeed even after a key person departs. For example, Berkshire Hathaway's stock dropped 15% after Mr. Buffett retired. It has since recovered 7% and is expected to continue performing well. Even with the world's greatest investor gone, Berkshire remains a great business.

Product or Service Failure: Google’s failure with BERT led to the market completely writing them off in the AI race. It was a classical example of the market overreacting and extrapolating current trends into the future. There will inevitably be product or service failures in the lifetime of every great company. An investor must judge if it is a temporary miss or if the business model’s moat is affected. These can be great opportunities to buy into wonderful businesses.

Legal or Regulatory Reasons: Legal or Regulatory Issues: Headlines can often create a negative sentiment for a stock. However, a legal or regulatory issue that affects only a small part of a company's business can create a buying opportunity. The key is to determine if the issue is a temporary blip or a long-term threat to the company's valuation.

Broader industry losing pricing power/profitability: if consumer behavior changes and the whole industry is unable to pass on price increases to end customers, then the business is probably suffering a permanent hit.

Broader industry has increasing competition: if the barriers to enter an industry have reduced, then the increasing competition makes most potential drawdowns unattractive for investors.

Economic downturn or Recession: In economic downturns, the markets are prone to selling off even good companies below their intrinsic valuation.

Geopolitical events: Geopolitical events can give rise to wonderful buying opportunities, as the whole market sells off. Market sell-offs can trigger many quantitative funds to reduce overall exposure to the stock market, without regard to the prices at which they are selling.

Policy uncertainty: Good companies can navigate political changes and policy uncertainties. Any drawdowns due to near-term concerns about policy decisions hurting a sector can lead to potential opportunities. Healthcare is a good example of this: Leave a comment