Recurring revenue as an asset class
Recurring revenue as an asset class
Hello friends and welcome back to another exciting and informational podcast!
Before we begin dosto, kya aapne yeh English proverb suna hai?: Give a man a fish and you feed him for a day; teach a man to fish and you feed him for a lifetime.
Recurring revenue ka funda yahi hai. The one-off fish meal can be compared to one-off sales and learning to fish can be compared to recurring revenue.
Toh kya hai yeh recurring revenue aur aap isse apne investment earnings ko badhane mein kaise use kar sakte ho?
Recurring revenue represents a revenue stream that is continuous and relatively predictable for a company - there is a high level of certainty that this revenue will continue to come in at regular, recurring intervals.
Mobile toh saal mein 1 baar khareedha jata hai by most people, and even less for a few people. Lekin recharge, nahi toh bill payment, har mahina hota hi hai. Computer ek baar khareedhte ho lekin internet ke liye har mahina bill bharte ho aur software licenses expire hone pe inhe renew karte hi ho, hai ki nahi?
Now expand this thought process:
Offices use software too, that too on a large scale. These contracts must be regularly renewed. Even in work from home, laptop aur software sab office ke taraf se provide kiya jata hai.
Corporates are now moving to cloud computing and cloud accounting. Aise services ke liye bhi the payout is recurring. Iska matlab yeh hai ki the income for such companies is also recurring.
Systems ka bhi same situation hai. The digital systems used by HR or for client management also often come with expiry dates upon which renewal charges need to be paid.
Why are we discussing recurring revenue?
Pandemic based uncertainty ko beat karne ke liye, recurring revenue can be a potentially great investment option. After all, at this point a consistent and constant stream of revenue gives tremendous confidence to potential investors.
Iske 2 positive outcomes ho sakta hai:
Dividends milne ki possibility hai in the case of dividend stocks
Regular earnings dekh ke, people might be willing to pay a higher amount for stock of the company, meaning those who have already invested could potentially exit at a profit
How to spot companies that might have recurring revenues
Recurring revenue stocks kar ke koi special, unique category nahi hai. Aapko khud research kar ke jaanna padega, which companies display potential for recurring revenue. Hum aapko kai Industries ke taraf point kar sakte ho, but I'm sure ke iske alava bhi there are lots of options.
Aaj kal companies and residential complexes have contracts for security and housekeeping, for example. Yeh contracts 2 saal, 3 saal aur 5 saal ke liye rehte hai aur contract legally binding bhi rehta hai. Sometimes, equipment or commercial space is also leased based on a contract.
Yeh subscription based companies ko guarantee hai ki for the duration of the contract, monthly payments mil hi jayega. There are also late payment charges and penalties for early cancellation of subscription.
….Nahi toh like cable companies, maybe they just keep people on hold for so long ke customer soch leta hai ki: forget it yaar I'll just keep paying; these people are too annoying.
I'm joking about keeping people on hold of course ;)
Lekin haan, these companies can be fairly certain that monthly payments se nahi toh cancellation penalties se, revenue aayega hi.
Subscription-based businesses - specifically auto renewing contracts.
We spoke about how even if you're working from home, your office (well most offices) will usually supply their employees with laptops and basic software. That's where big brands like Microsoft come in - doesn't everyone renew their MS office and antivirus subscriptions very religiously?
Itna regularly khud ke eye checkups nahi karte honge lekin MS office and antivirus subscriptions on time, every time renew karte hi hai admin log…. Or whoever is in charge of it...Because the office might just collapse without them. In fact most companies set them to auto renew.
Isse subscription based service provider ko recurring revenue ki guarantee mil jati hai - at least to a good extent, even if not a 100% guarantee.
The same goes for new age subscription based services like cloud storage and cloud accounting.
Every industry will additionally have its own bundle of subscription based services. For example, PR and marketing companies cannot carry out their business without their subscriptions to media tracking services. Travel agents use something called a Global Distribution System to get your tickets. Hotels and airlines use certain systems to calculate room and seat pricing and so on.
Aapke industry mein kaun-kaunse subscription-based companies hai? Are any of these listed? Observe their financial track record and historical stock pricing.
The Apple type
iPhone har maheene nahi khareedhte ho, but every time you lose or spoil your headphones - or your air pods - aapko Apple se hi lena hota hai nah? Charger kharaab ho gaya toh aap Apple se hi lena prefer karoge na? Authenticity is the main reason yaha doston.
Sirf Apple nahi there are many businesses that have perfected the art of cross selling.
Let's have a look at DTH - not only does the subscription auto renew, but every now and then you need to upgrade your set top box. And of course you can only buy it from that specific company. Tata Sky hai toh Tata Sky se hi set top box lena hoga.
Bare necessities or essential items
Brands that supply things like toothpaste, soap, rice, salt, spices, dairy and other essentials that people will always need - no matter what the economic situation - can also often say with some certainty ki humare company ko kam se kam itna revenue har mahina mil hi jayega.
Ek baat pe dyaan dena - these should be essential items. High end, fad based, overpriced food items might not fall in this category. Quinoa, for example, yeh category mein most likely nahi ayega.
Precautions to take; considerations to think about:
In companies ko - to a certain level - continuous aur steady income ka guarantee hai lekin 100% guarantee nahi hai. For example:
Another new player can come and steal their business.
The status quo can change and a business can simply become irrelevant. Look at how mouses, mouse-pads and keyboards are losing ground, for example.
A raw material cost or some other input cost might spiral out of control, killing their profits.
Dusri baat: you are investing in these companies via the stock market. Company jitna bhi profitable rahega, if the stock price does not increase, you do not get any earnings in the absence of dividends. There's no guarantee ki stock price zaroor badhega aur kitne time mein badhega.
Tisri baat: kabhi kabhi you might have to pay a very high price for such stock because most investors find the idea of a company with guaranteed income more appealing.
Aaj ke liye bas itna hi doston. Jaane se pehle, ek baat yaad rakhiye ga ke stock market investing mein risk hamesha rahega. This podcast has been made for educational purposes only and the investor must do his own research as well.
Aise aur interesting podcasts sunne ke liye humein follow karein via youtube and other social media channels. Until then goodbye and happy investing!
Investments in the securities markets are subject to market risks. Read all the related documents carefully before investing.