Everywhere you look right now, it seems like corporate America is increasingly turning towards subscription services to monetize its customers.
After all, why wouldn’t businesses do this?
Subscription services offer corporations a far better way to turn demand into revenue than one-off sales. Subscription services allow for greater revenue predictability, since they create annually recurring revenue streams that will come in every month and every year, barring churn. They also allow for better customer stickiness, since churn is reduced by the friction of cancelling a subscription. If the subscription service is software-based, it’s also a particularly high-margin way for companies to monetize demand, since they can provide the same service to multiple customers (one cost for multiple revenue streams).
Because of these various advantages, subscription services are the future of the economy. The investment implication? Buy subscription stocks.
What does that mean exactly? Buy the stocks of companies that have figured out the subscription economy, and are leveraging one or multiple subscription services to increase revenue predictability, reduce customer churn, improve margins and ultimately boost their profits. Those stocks will head higher in the long run.
Without further ado, then, let’s take a look at seven of the best subscription stocks to buy for long-term gains.
Best Subscription Stocks to Buy: Apple (AAPL)
At the top of this list of best subscription stocks to buy, we have consumer technology giant Apple (NASDAQ:AAPL). Apple is building out a software subscription ecosystem to more fully monetize its giant hardware install base.
Apple is a trillion dollar company. It got to a trillion dollar valuation by creating the world’s most robust hardware ecosystem. Today, that ecosystem measures about 1.5 billion devices globally, including about 1 billion iPhones (so it probably encompasses around 1 billion consumers, assuming one phone per person).
But, growth in this hardware business is drying up. That is, with 1 billion people globally already using their devices, Apple doesn’t have that much more room to grow its hardware business.
In response, Apple is turning to the software segment. Specifically, they are building out a suite of subscription software services — like Apple TV+, News+, Arcade, Music, etc. — and pushing those services to their giant install base. The hope? Some consumers in that 1 billion large install base will pay up for the services, and this demand will turn into a potentially very large, very high-margin revenue stream for Apple.
Big picture — the next leg of growth at Apple is all about software, and the more Apple’s software subscription services gain momentum, the higher AAPL stock will go.
Netflix (NFLX)
Next up, we have the king of the subscription economy today, streaming giant Netflix (NASDAQ:NFLX), which will inevitably leverage secular internet TV tailwinds to continue to grow its already huge subscription business.
Right now, the Netflix growth narrative is dominated by competition concerns. That’s only natural. Netflix has been running unchecked in open fields for a long time. Now, competition is coming onto the scene in a big way. Naturally, this new competition is accompanied by concerns that the Netflix growth narrative will slow.
But, it won’t. Netflix has a huge competitive moat in the form of its original content. Sure, maybe some consumers are paying $10 to $15 a month to watch re-runs of legacy content on Netflix. But, that’s pretty illogical — most consumers are paying $10 to $15 a month for Netflix to watch original content you can’t get anywhere else. The “you can’t get anywhere else” part is what will help Netflix fend off increased competition.
Further, streaming TV tailwinds are so big globally that any churn Netflix does experience as a result of competition, will be more than offset by streaming TV market expansion.
Big picture — near-term competition concerns are overstated, and NFLX stock remains a long-term winner supported by a strong subscription business.
Disney (DIS)
Following in the footsteps of Netflix, media giant Disney (NYSE:DIS) is diving head-first into the streaming world. In so doing, they are building out a subscription business that could one day be massive.
For the past several years, Disney has been hit hard by cord-cutting headwinds. Not many people know this, but Disney’s biggest business isn’t the Parks business or the Studio business. It’s the Media Networks business. That business makes most of its money from the pay-TV world. That pay-TV world is losing demand thanks to cord-cutting. As it has, Disney’s revenue and profit trends have been sluggish.
Disney is trying to solve this problem by launching its own direct-to-consumer streaming subscription service, Disney+.
Early demand for this service was huge. Disney+ signed up more than 10 million customers in the first day alone. This big demand won’t go away anytime soon. Disney has a treasure chest of content that is second-to-none. And consumers are willing to pay up for this content, as Disney dominates the box office every year. As such, it reasons that at $7 per month, Disney+’s huge demand drivers will persist until the platform becomes massive.
As Disney+ goes from small to very big, Disney’s revenue and profit trends will improve, and DIS stock will march higher.
Axon (AAXN)
Much like Apple, law enforcement technology solutions provider Axon (NASDAQ:AAXN) is building out a suite of a software subscription solutions to more fully service (and monetize) its already sizable hardware install base.
The Axon growth narrative is very similar to the Apple growth narrative. It’s just the Apple growth narrative on a much smaller scale with a much more narrow focus.
Axon started out by selling technology hardware solutions to law enforcement agencies worldwide. These solutions included tasers, smart weapons, dash cameras, body camera, so on and so forth. But, over the years, Axon has developed a suite of software subscription solutions to complement their hardware offerings. These solutions include Axon Records (a records management system), Axon Evidence (a data storage platform for evidence) and many more.
Financially, the important part is that, relative to the hardware businesses, the software businesses have a bigger addressable market since law enforcement agencies can buy multiple subscriptions for each service. These businesses also run at higher margins. Thus, the more Axon’s software growth narrative ramps, the more Axon’s revenue and profit trends will improve.
The more those trends improve, the higher AAXN stock will go.
Adobe (ADBE)
Creative solutions giant Adobe (NASDAQ:ADBE) has created an empire in the creative solutions world on the back of software subscription services. This has made ADBE stock one of the best subscription stocks to buy now.
The story at Adobe is pretty simple. This company has forever dominated the creative solutions market. If you want to make something creative at the individual or enterprise level, you use Adobe to do it. Back in 2010, Adobe offered all these services in a legacy, on-premise model. Then, in 2012, Adobe launched Creative Cloud, and started its transition from offering these services in a legacy, on-premise model, to offering them in a cloud, subscription model.
Consumers were initially upset. The pivot made Adobe’s solutions more expensive for them. But, nobody stopped paying for Adobe’s creative solutions. Instead, demand has done nothing but grow at an impressive rate ever since.
Why? Because Adobe has no competition, and whatever competition there is out there, Adobe’s creative solutions are so much better, that they are worth paying up for.
Because of this dynamic, Adobe is supported by a low-churn, high-margin business model that has room for further margin improvements through price hikes. At the same time, secular tailwinds in the creative solutions market (the world is more visual today than ever before) support big revenue growth in these businesses, too.
When you put it all together, Adobe is a big-growth, low-churn, high-margin business. Those fundamentals guarantee ADBE stock a bright future.
Shopify (SHOP)
E-commerce solutions provider Shopify (NYSE:SHOP) is one part subscription software business and one part e-commerce marketplace — and both parts are supported by powerful secular growth tailwinds.
On one end, Shopify has a big subscription software business wherein the company builds e-commerce enabled websites and offers various online retail tools to retailers and merchants. On the other end, Shopify has a big marketplace business wherein the company takes a cut of all sales that happen on Shopify websites.
Both of these businesses are high-margin businesses. Both of them are also supported by powerful secular growth tailwinds.
Long story short, the entire retail world is pivoting toward direct retail. Simultaneously, it’s becoming increasingly decentralized thanks to a rise in the entrepreneur economy. The overlap of these two trends is birthing a new era of direct, decentralized commerce — and Shopify provides the infrastructure backbone for that form of commerce. Broadly, then, the more the direct, decentralized commerce trend gains momentum, the more Shopify websites there will be, and the more sales that will happen on those Shopify websites.
Consequently, Shopify is a big-growth company with two big-growth, high-margin businesses. Ultimately, that means Shopify’s revenues and profits will roar higher in the long run. As will SHOP stock.
Chegg (CHGG)
Last, but not least, on this list of subscription stocks to buy is connected learning platform Chegg (NASDAQ:CHGG), a company that has turned students’ secular demand for academic help into a strong, rapidly growing software subscription business with huge margins.
High school and college students have always needed and will always need academic help. Whether it be homework help, tutoring, writing help, or test prep, the academic world provides enough challenges to students, that students are constantly looking for assistance.
Chegg gives them that assistance in the exact way they want it. No in-person appointments — professors, teachers and tutors can be intimidating, and their teaching often isn’t personalized. No strict times — students are also so busy with sports and extracurricular activities that it’s hard to follow someone else’s schedule. Instead, Chegg has created an on-demand, digital learning platform where students can receive academic help in a personalized manner through the online channel. Sometimes that just makes the most sense for students’ schedules.
In so doing, Chegg has found a way to optimally monetize students’ secular demand for academic help. It has created a platform that they will love to use for academic help, and it will get them to pay a subscription fee to use that platform.
This simple, yet powerful, business model has powered huge gains in CHGG stock over the past five years. Because this growth narrative is far from over (Chegg still hasn’t even started international expansion), CHGG stock will keep powering higher over the next few years too.
As of this writing, Luke Lango was long AAPL, NFLX, DIS, ADBE, SHOP and CHGG.
