The Value Investor v.22 ”Recurring revenue”


  • Part 1: Introduction
  • Part 2: Moats
  • Part 3: Special events
  • Part 4: Quality
  • Part 5: Growth, value
  • Part 6: Recurrent revenues

If there is anything that the market loves so it is recurring revenue. It is perhaps not so surprising when you think that it is very much more profitable for a company to t.ex. have fifteen large, loyal customers than to get occasional orders from the companies that you currently succeed in getting contact with.

Recurring revenue can of course look very different, but typical situations of the market tend to value quite highly is prenumerationsintäkter of various kinds. The beginning to subscribe to something, t.ex. a bredbandsbolags services or a software system, has a tendency to remain a customer. Even if, perhaps, you are not completely satisfied with the services you buy so it is often associated with a lot of hassles and costs to switching, as the customer usually sit still in the boat.

There are many people who have managed to create prenumerationsliknande revenue but few have excellerat as well as a certain company from Seattle. Microsoft was familiar to establish a near-monopoly on the operating system, and basal kontorsprogramvaror with Windows and Office. These were not necessarily the best on the market but once you come up in a dominant position became the standard for the vast majority. Microsoft had thus carved out a fine moat (see part 2) against competitors and needed ”only” to work with to develop the programs, they bought the customers with new, often much better versions each and every year. Not only that, but all the new win-PC which was sold, of course, had Windows installed, which created huge revenues and soaring stock price, see picture.

MSFT, image source: Avanza

In the beginning of the century, however, began the trend to run away from Microsoft. A ”standard PC” and Office programs were good enough that customers would not switch nearly as often, Apple started to come back into the match and offered, as well as Google, the operating system and upgrades free of charge. This made Microsoft’s share price stood and stomped on the many years despite the large buy-backs, see picture above. Then decided MSFT to go all-in with prenumerationsmodellen. Offered from the summer of 2011 the customers ”Office 365” which is a service where you with an annual fee is charged to the insured a constantly updated version of the programs. Customers, especially business users, swallowed the bait. The market loved this, and the share price has risen in the principle ever since.

How to which investors rely on the market’s huge preference for recurring revenue is very reminiscent of the search for companies with moats. It comes to find these companies before most realized that the company is creating such a position. One must always not be first on the ball but you must not was the last. To continue taking Microsoft as an example, the as could the PC market first chance to get ahead of the market in the 80’s and 90’s when t.ex. there were plenty of Office-like competitors on the market but even after that man had put on to the Office 365 model, and this began to show themselves to be excellent, see picture above. Can usually the one who knows the market well see things that others miss. Announcements of new business or partnership can t.ex. missförsås badly of those who are not so familiar. Something that will have huge strategic importance can be seen as just a novelty in the amount o.p.v. Knowledge is always A and O for värdeinvesteraren.

It often misses the market so long that prenumerationsliknande revenue is being created. My oldest holdings Apple created over several years (approx. 2012-16) slowly but surely, a private ecosystem that a customer that have come into the rarely leaves due to the large cost and hassle to switch more or less everything in his today so important digital life. Apple built this with huge investments in data centers, which enabled new services and software, but it was still right to get that before the 2016 realized what was about to happen. It was only when their Services segment began to rush in the quarterly reports, with over 20 % annual growth as the market started to become interested. AAPL share rose ago, see the picture below, despite the fact that it was already the world’s highest valued company, in less than a year with 50 % or more than 250 billion dollars. Services are then a quarter now Apple’s largest segment after the iPhone and the only thing that is in steady growth.

AAPL, image source: Avanza

However, there are lots of companies that take advantage of similar business models. It is not difficult to find if you put a little bit of time on it. To take a more nearby example, look at the Finnish manufacturer Kone, which installs their lifts, and then serve them for decades out in the field. Datorspelsbolagen, they are often masters at creating loyal customers who continue to buy upgrades, new versions, etc Gambling companies to name a currently hot industry, often create long-term relationships with the players. Mobile operators, electricity companies, banks (major banks as well as nätmäklarna) and the software industry are just a few additional examples of where you can find these models.

A warning is however in place. As always, when something is loved by the market, it is very dangerous to lose this. The market is often in shock and hold a share of just the fear, justified or not, that one begins to lose subscribers, etc, to See just how Disney has treated of the market in the recent years since this very successful company began to lose subscribers to its sport channel ESPN.

Risks despite prenumerationsliknande or other types of steady, recurring revenue is a source of enormous wealth for the shareholders who buy before all others have done it. A loyal clientele is the most valuable thing a company can have, all categories.


Like this post? Please share to your friends:
Leave a Reply