Subscriptions Fueling More Growth for Tech Stocks The tech giants are all turning to subscriptions to boost growth than Sales since they seem to provide consistent revenue.
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In stock trading and investing, you should be looking for successful industries to invest in. That’s important since successful industries could have high performing stocks. But for a deeper insight, it helps to identify what trends are contributing to the stocks rising higher in the industry. That can tell you whether this momentum can be maintained or not, which can help you take better decisions. A Trend that Could Fuel Further Sustained Growth for Tech Stocks The technology industry is booming, and it’s seen in how the tech stocks have managed to really soar recently with their high earnings and tremendous growth in revenue. It is a sector really not to avoid.
Now analysts at The Wall Street Journal are
identifying another growth and revenue driver within this tech industry, and it isn’t sales. Rather, it’s customer subscriptions. The tech sector is wide and has many applications, but it was the software subsector that first underwent the shift in its pricing model towards recurring annual fees rather than one-time sales. We’ve seen that particularly in the antivirus industry. This subscription model of pricing has since spread from the software www.tradezero.co
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sector to the other areas of tech. The big names in the industry have adopted it – Amazon ($AMZN), Apple ($AAPL), Electronic Arts ($EA), Adobe ($ADBE) and Microsoft ($MSFT). Why Subscriptions Appear More Attractive than Sales So why this move towards subscriptions from one-time sales? As the S&P 500 Information Technology Index (S5INFT) rose by 148% in the past five years and by 5% year-to-date, according to the S&P Dow Jones, the technology index rose to over 18 times earnings from just 15 times earnings as per Yardeni Research, quoted by Investopedia’s Mark Kolakowsky. With such high valuations, the big tech corporations need new and predictable sources of earning profits to ensure their stock keep pointing higher. And subscriptions are considered that source. One-time sales are considered volatile, and they are cyclical in nature. They can’t always be trusted upon to keep coming. Subscription pricing helps them ensure consistent revenues over time. These companies have therefore been benefited by higher valuation multiples and stock prices. www.tradezero.co
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Apple’s App Store Subscriptions Let’s look at Apple ($AAPL). The tech giant has led the way insubscriptions, particularly through its App Store, and Kolakowsky quotes The Wall Street Journal as reporting that revenue from subscriptions exceeds device sales for Apple. Revenue from subscriptions in its latest fiscal year was around $250 billion while sales only returned $200 billion. Bernstein analyst Toni Sacconaghi is therefore of the opinion that Apple should get “more aggressive” in shifting towards subscription pricing. Sacconaghi believes that bundling various services and devices for a monthly fee and, after a period of time, providing automatic upgrades would secure revenue streams and cause “a material re-rating of the stock’s multiple.” Amazon’s Subscription Services Are Growing with Prime and Cloud Services While Amazon gets most of its revenue from merchandise sales, its subscription services keep growing fast and could very soon add to much greater chunks of the company’s revenue. With the Amazon Prime subscription service, consumers get free shipping
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along with video streaming of a variety of content. This earned $9.7 billion of revenue for the company in its latest fiscal year, which is a 52% rise from the previous year. Amazon also tastes growth with its cloud computing service. It has helped generate 52% more profits than what the company’s North American retailing generates, though that only currently contributes to a sixth of the company’s revenue. Microsoft Gains with Office and Xbox Subscriptions Moving over to Microsoft, it now has nearly 30 million consumers who subscribe to the Office software. Its Xbox Live manages to bring in 59 million gaming subscribers. Competing gaming service Electronic Arts ($EA) makes around 24% more revenue from subscriptions than from sales of discs with gaming software. Adobe’s Photoshop and Acrobat Draw in Subscriptions Adobe is the creator of two of the most popular software products in the world, Photoshop and Acrobat. And 84% of the company’s revenue comes from subscriptions. In each of the past 13 quarters the company has been experiencing successive
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revenue growth, with its market value nearly tripling in two years. With this trend, it is clear that subscriptions have the capability of earning more in a sustained manner for the tech giants. Kolakowski isn’t sure if the big tech giants could persuade customers to totally move towards subscriptions and give up one-time purchases. But the success of the subscriptions could contribute directly to the continued growth of these tech stocks.
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