Often dubbed the software backbone of the Subscription Economy, Zuora (NYSE:ZUO) reported strong first-quarter numbers in early June. Those results showed that the Subscription Economy has been largely resilient during the novel coronavirus pandemic and indicated that there are bright days ahead for ZUO stock.
The Subscription Economy is exactly what the name implies: an economy built on subscriptions. This economy has been gaining significant traction over the past several years because enterprises have increasingly pivoted to subscription business models in order to generate more stable, higher-margin and more predictable revenue.
Zuora provides the software backbone of this economy. The company offers a suite of cloud-hosted software solutions which enable companies of all shapes and sizes to pivot to a subscription-based business model.
Consequently, as the Subscription Economy has boomed over the past few years, so has Zuora. From fiscal 2016 to fiscal 2019, Zuora’s sales tripled.
But Zuroa’s quarterly numbers amid Covid-19 suggest that its strongest growth is yet to come. Its Q1 results also indicate that ZUO stock is ready to rip higher over the next decade.
The Subscription Economy Proves Its Value
Importantly, Zuora’s Q1 results confirmed that the Subscription Economy is worth its weight in gold, thanks to its resiliency and its ability to consistently outperform, even during a crisis.
Over the past several years, Zuora has published the Subscription Economy Index which shows that companies built on subscription business models consistently grow faster than companies that utilize traditional business models. That’s mostly because consumers prefer subscription models due to their unmatched flexibility and consistent accessibility.
Indeed, from 2013 to 2019, the revenues of subscription businesses grew five-times faster than than those of the average S&P 500 company.
The coronavirus pandemic only deepened this divergence.
In the months of March, April and May, half of Zuora’s customers did not experience meaningfully lower subscriber growth. Around 20% of its customers actually reported that the growth of their subscriber totals had accelerated.
Further, the revenues of those companies rose almost 10% year-over-year. By comparison, the revenue of the S&P 500 increased less than 1% in Q1.
In other words, in the midst of a global economic shutdown, subscription businesses both weathered the storm with impressive resiliency and continued to meaningfully outperform businesses with traditional models. That was a loud, unequivocal reminder that subscription businesses are superior to traditional ones.
The model’s proven resilience should lead to robust Subscription Economy growth over the next few years.
Businesses that have already partially pivoted to subscription models will double down on them. At the same time, many businesses that haven’t yet adopted subscription models will do so.
Thanks partly to Covid-19, the Subscription Economy is going to explode higher in the 2020s.
Zuora Stock Is Ready to Rip Higher
Because Zuora is the software backbone of the Subscription Economy, explosive growth throughout the sector in the early 2020s will translate into explosive growth by Zuora.
MGI Research believes that enterprises will pour $172 billion into subscription business model transformations over the next few years.
Zuora will obtain the lion’s share of those dollars, both because the company is the market leader when it comes to back-end subscription software solutions in general and back-end subscription billings solutions in particular and because the company continues to launch new products. One of its new offerings is Zuora Revenue, the market’s first automated revenue recognition platform built specifically for subscription businesses.
Zuora only reported $276 million of revenue last year. So it’s a multi-hundred-million-dollar revenue company at the epicenter of a multi-hundred-billion-dollar growth industry.
That’s a recipe for sustained huge revenue growth by Zuora.
Over the next several years, more companies will pivot towards subscription businesses. Those companies will spend more money on subscription solutions, and almost all of them will spend a great deal of money on Zuora’s products.
As a result, Zuora’s annual revenue should increase 10%+ for a long time. Its profit margins will expand meaningfully because its can easily accommodate growth. Double-digit-percentage revenue growth plus meaningful margin expansion will result in 20%+ profit growth. Consequently, ZUO stock will surge way higher over the next few years.
The Bottom Line on ZUO Stock
I like ZUO stock as a long-term, buy-and-hold play on the booming Subscription Economy.
Zuora’s stock hasn’t advanced much over the last year. But two things are different today versus a year ago.
First, ZUO stock is much cheaper than it was a year ago. It’s more than 10% cheaper on a price-to-sales basis, according to YCharts. Secondly, Covid-19 has loudly shown why subscription business are better and should serve as a catalyst for accelerated adoption of subscription models.
As a result, I think ZUO stock is a great buy now. Long-term, positive catalysts will push this stock meaningfully higher within the next several years.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not hold a position in any of the aforementioned securities.