3 Stocks to Buy as the Subscription Economy Continues to Grow
The subscription economy has translated into recurring revenue for many corporations. It’s an attractive business model that has become more accessible due to software and scalability. This has led to this list of subscription economy stocks.
However, with more subscriptions available, businesses have to stand out to retain customers and attract new ones. Furthermore, these corporations must hold onto most of their customers after announcing price hikes. Keeping monthly subscription costs too low for too long can hurt profits and make scalability more difficult.
The subscription economy has been around for a while. However, these three subscription economy stocks continue to dominate the industry and can gain value from current price levels.
Amazon (AMZN)
Amazon (NASDAQ:AMZN) has many subscription plans for its core products. Amazon Prime has been a big hit since its 2005 launch and revolutionized how corporations approach shipping and handling.
Prime members enjoy free one-day and two-day shipping. It’s even possible to receive free same-day deliveries for qualifying orders. Walmart (NYSE:WMT) released its version of Amazon Prime in 2020 while Target (NYSE:TGT) recently announced another copycat. Amazon has had more than a decade of largely uncontested space with its subscription model.
Amazon also offers streaming for its Prime members. The company has built a vast library of content that’s readily accessible as a part of your Prime membership. This makes it one of those subscription economy stocks to consider.
Amazon Prime is great, but the company also makes a lot of money with Amazon Web Services. This cloud computing profit engine relies on monthly subscriptions and still achieves double-digit year-over-year revenue growth. AWS segment sales were up by 13% year-over-year in the fourth quarter of 2023. Overall revenue increased by 14% year-over-year.
Crowdstrike (CRWD)
Crowdstrike (NASDAQ:CRWD) offers cybersecurity solutions for corporations seeking extra protection from cyberattacks. The company recently soared on solid earnings while other cybersecurity firms faltered. Revenue increased by 33% year-over-year while net income surged to $53.7 million for the quarter. The firm reported a net loss of $47.5 million in the same period last year.
Subscription revenue is a key driver for Crowdstrike’s financial growth. The firm closed out fiscal 2024 with $3.44 billion in annual recurring revenue. This good baseline combined with strong revenue growth suggests the stock can march higher in the long run. Shares are up by 170% over the past year and have gained more than 400% over the past five years.
Profit margins are expanding substantially and should reach double-digits in the upcoming quarters. The Q4 FY24 profit margin was 6.35%. The stock trades at an 83 forward P/E ratio and should end up with a more reasonable valuation as the firm continues to expand. Crowdstrike has a good opportunity since its still growing while other cybersecurity firms have warned of meaningful slowdowns.
ServiceNow (NOW)
ServiceNow (NYSE:NOW) makes most of its revenue from subscriptions. More than 8,100 enterprises pay ServiceNow for its business software. The software enhances productivity across the board by automating various tasks and helping organizations create streamlined workflows.
The firm’s 99% renewal rate suggests enterprises benefit from the tool. That high retention rate also gives ServiceNow more flexibility with raising prices in the future. ServiceNow has also experienced meaningful growth rates in the number of customers with annual contract values of $1 million. The company registered a 33% year-over-year growth rate for this metric in the fourth quarter of 2023.
ServiceNow also reported 26% year-over-year revenue growth in that quarter and almost doubled its net income year-over-year. Shares currently trade at a 90 P/E ratio, but continued net profit margin will help the valuation smooth out for long-term investors.
Long-term shareholders have been happy so far. The stock is up by 83% over the past year and is up by 213% over the past five years.
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