The New “Subscription” Economy… And A Small-Cap Pick To Profit
If you haven’t noticed yet, the subscription revenue model is the “in” thing right now.
Everything has a subscription component in today’s world. Want to stream television or listen to music? Just sign up for the monthly subscription. Want food delivered to your door, there’s a subscription service for that. Clothes? Yup, subscription service. Razors to shave with? Sign up here. Software programs for your computer? You bet. No longer do you buy a disk that you pop into your computer to download the latest suite of Microsoft products.
You can even sign up for recurring orders on Amazon on popular products that you order.
We live in the subscription economy.
I’ve especially noticed it as I go through hundreds of quarterly transcripts and investor presentations each quarter. Companies are sure to highlight their subscription recurring revenue base. And analysts demand it. The company would likely receive negative marks from analysts if they didn’t.
A lot of this can be traced back to the emergence of “the cloud”. Ever since the emergence of Salesforce (which I wrote about here), companies have begun to realize the superiority of this business model.
Take your software, put it on the cloud, and charge customers an annual fee to access it. Simple.
This Pick Helps Companies With All Things Subscription…
As great as the subscription model is for companies (it provides steady and predictable revenue) it can be a headache from an operations standpoint. You have to figure out the perfect price point, then bill and collect that monthly fee, which can be frustrating as customers lose their cards, change their cards, or let them expire. Then you have to deal with chargebacks. You have to keep track of customers and keep them happy, to keep churn low.
There’s a lot going on and a lot to keep track of when it comes to the subscription model.
But Zuora (NYSE: ZUO) is helping companies solve all these problems… with its subscription-based software platform that automates all subscription order-to-revenue operations in real-time.
Companies like DocuSign, Salesforce, Ford, Caterpillar, Microsoft, Zoom, and The Telegraph all use Zuora’s software to manage their respective subscription-based products or services.
Musical instrument company Fender used Zuora to launch its subscription service Fender Play. This proved fruitful, as Fender quickly grew its service to 200,000 paying subscribers with a 95% retention rate.
Zuora is still a small company ($2 billion market cap). But as our subscription economy grows, Zuora should continue to grow right along with it.
Over the last five years the company has grown sales at a respectable 22% compound annual growth rate, taking sales from $113 million in 2016 to $305.4 million last year.
The company hasn’t turned a profit yet, but it did produce its first year of positive cash flow last year: A nice $20.3 million, compared with a $4.8 million loss the year before.
The balance sheet looks good with $197.4 million in cash on hand, which is more than enough to cover its total debt obligations of $69.5 million.
And as you can see, shares just recently broke out to new highs… a good sign of things to come.
Action To Take
There’s no doubt that the subscription economy is set to grow. It’s part of the larger “cloud” based revolution I wrote about a few days ago – a revolution that still has a lot of room for growth ahead.
Zuora will be there to help companies make that process more efficient and overcome all the headaches that can accompany it.
A word of caution, though: Investors will want to see Zuora continue to grow its own subscription base. If that slows, investors will surely punish the stock. As I mentioned earlier, this is a small-cap stock, so expect some volatility and size your position accordingly if you end up getting into this one.
P.S. There’s another area of the market I’m watching closely right now… and it could make investors an absolute killing in the months ahead…
You may have seen the headlines about the new space race that’s taking shape right now… Billionaire investors like Richard Branson, Elon Musk, and Jeff Bezos are already making waves… Not to mention a handful of lesser-known companies and private investors.
The good news is that you and I can get in on this race, too, thanks to a secret “backdoor” way we can piggyback on one of SpaceX’s latest projects.