Wise words of wisdom have me hunting for three up-and-coming stocks that use a subscription-based business model to drive revenue.
How so, you ask?
Tech VC Howard Lindzon’s daily email landed in my inbox Friday morning and, as usual, it was filled with actionable advice.
Here’s a bit of what he had to say:
“In 2018, if you can figure out how to turn your internet business into a subscription business (and keep your customers happy), you will be rewarded with prime real estate asset prices AND extremely high multiples and valuations on all kind of new metrics built just for you and your ability to tell stories.”
To be clear, Lindzon is talking about entrepreneurs and businesses interested in taking their game to another level, but he also speaks to the fact a lot of the stocks he owns are subscription-based businesses like Netflix, Inc. (NASDAQ:NFLX) and Amazon.com, Inc. (NASDAQ:AMZN).
However, you can hardly call NFLX and AMZN up-and-coming stocks with market caps of $136 billion and $760 billion respectively.
No, to me, up-and-coming stocks are businesses that are relatively new or have a new product that will drive growth, are preferably making money (although that’s not mandatory), are disrupting or dominating their industry in some fashion and have a market cap of less than $10 billion.
Now, layer on to this a subscription-based business model and you’ve got the makings of a potentially profitable investment.
Here are three up and coming stocks to consider for your investment portfolio.
HR Continues to be a Big Money Maker
Minneapolis-based Ceridian HCM Holdings Inc (NYSE:CDAY) — it operates Dayforce, cloud-based human capital management software that allows a company to manage the entire HR process better — went public April 25 selling 21 million shares at $22 a share. As of May 4, CDAY stock is up almost 54%.
Nice haul for those lucky enough to get in. If you do own CDAY stock, you ought to hang on to your shares for the long term. Here’s why.
First, all of the gross proceeds of the offering — $631 million, which includes the underwriters exercising their over-allotment of 3.15 million shares — go to the company, not to selling shareholders, to pay off 11% notes and use for other general corporate purposes.
Secondly, pre-IPO investors invested $100 million in a private placement at the same time as the IPO, which allows them to remain in control of Ceridian while also providing the company with additional resources for growing the business.
I like that move.
Lastly, Dayforce has over 3,000 customers who pay a per-employee, per month (PEPM) subscription with an initial term of 3-5 years. If the customer grows headcount, Dayforce wins.
Dayforce has grown its cloud revenue by more than 60% on a compounded basis over the past five years.
I see it as one of the best up-and-coming stocks to own on the NYSE.
A Bet on the Entire Subscription Industry
Zuora Inc (NYSE:ZUO) are the people you go to when you want to take Lindzon up on his advice and transform to a subscription-based business model.
“When we started Zuora, we knew we were betting on an inevitable transformation that would take place over many decades. Although we all can now see the world moving to the Subscription Economy, we believe the shift is still in the early phases,” wrote CEO and co-founder Tien Tzuo in Zuora’s prospectus.
“We also recognized that building and delivering the solutions that companies need in this new Subscription Economy would be an opportunity to build an enduring enterprise software company like Microsoft, Oracle, or Salesforce.com. And so we focused on, and will continue to focus on, building a business for the long-term.”
I like the long-term thinking.
ZUO went public April 11, selling 12.65 million shares, including the over-allotment at $14 a share — above its initial pricing range. It gained 42.9% in its first day of trading but has given a little bit of that back in the last three weeks.
In the past three years, Zuora has grown its subscription revenue by almost double from $68.2 million in fiscal 2016 to $120.4 million in fiscal 2018. At the same time, the cost of those revenues remained flat — around a 74% gross margin — which means, as it scales the business in the next 2-3 years, it’s going to start making money and lots of it.
Fashion Using Tech to Win
I won’t say much about Stitch Fix Inc (NASDAQ:SFIX), the last of my up-and-coming stocks, other than to say I think what it’s doing with fashion and artificial intelligence is the wave of the future.
It has combined high tech with high touch in a subscription-based business model that’s going to have women everywhere clamoring for its personal-shopping service.
If women get their rightful seat at the corporate table, they’re going to be too busy to go shopping as often. Stitch Fix solves this problem in a fashionable way.
That’s why in January, I called it one of the seven stocks to buy that are winning with tech.
The best part? It’s already making money.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.