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Update: since writing the above, the share price has fallen by 50% on the day, on very heavy two-way volume. That is pretty astonishing, for an update that probably would have trimmed the share price by about 10%, in more normal markets.

To reiterate, the key point to understand is that G4M's marketing spending being 8.4% of revenues last year, and that this is discretionary, and is being used to drive growth. The point is that when the business is, say 5 times its current size, then marketing will drop to a much lower % of revenues. That fall will drop straight through to profits. Hence it's nonsensical to try to value the business at this rapid growth stage, on a multiple of current earnings. We need to look forwards, and value it on a multiple of future earnings, once the net margin has gone up to something more like 5-10% of revenues.

If you get that point, and are prepared to hold for the long-term, then I am pretty sure that today's price plunge to 255p makes a very nice entry point. Time will tell.

1X2
Gear4Music
Share price: 255p (down 50% today, at 10:14)
No. shares: 20.9m
Market cap: £53.3m
Trading update

Gear4music (Holdings) plc ("Gear4music" or "the Group"), the largest UK based online retailer of musical instruments and music equipment, today announces a trading update for the four months from 1 September 2018 to 31 December 2018 (the "Period").

The next year end is 31 March 2019 - NB this is a 13 month period, as the accounting year end was recently extended by a month, for operational convenience.

Key points;

Continued strong organic revenue growth at +41% (up from 36% in H1)
Europe & RoW sales growth higher than UK (+47% and +36% respectively) - overseas sales are now close to overtaking UK sales - important, as a global sales opportunity deserves a higher rating for the share than just a UK business
Capacity constraints reached in York distribution centre - implies sales growth could have been higher. Plans to increase capacity in 2019
FY2019 EBITDA to be slightly below FY2018 - this is not likely to go down well in current stock market conditions
Swedish distribution centre expanded - now have good spare capacity headroom at both European centres

Outlook - strong sales expected for the rest of this financial year.

Competitive pressures on margins are mentioned;

Our focus has been on gaining market share in what has been a highly competitive environment, and in support of this target and following a period of planned investment, margins during the Period began to return towards historical levels. We are confident of further improvements as we progress through FY20.
That sounds as if margins should improve going forwards.

My opinion - I see the share price has fallen 30% in early trading, which looks a ridiculous over-reaction.

The business model at G4M is to grow as fast as possible. Then the profit taps can be turned on later, because marketing spend as a percentage of revenues can be reduced. The market probably doesn't understand, or isn't even interested in this point right now.

Long-term this share is a winner, in my view. However, at the moment, growth stocks get clobbered so badly if they put a foot even slightly wrong.

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