Annual recurring revenue makes it easier for corporations to hit benchmarks and generate returns for long-term investors. Companies with this business model can boost revenue by attracting new customers, offering more subscription plans and raising product prices.
Some stocks with annual recurring revenue have comfortably outperformed the S&P 500 and the Nasdaq 100. It’s very difficult to switch once customers get comfortable with a software product or another service. For most companies, switching isn’t worth the effort, especially when competitors offer marginal improvements at best.
While annual recurring revenue models offer great potential, they’re even better if a corporation reports profits. Once an unprofitable company reports its first profitable quarter, net income can grow rapidly in subsequent quarters. That’s already played out for some of the growth stocks on this list. Investors looking for companies with vibrant annual recurring revenue models may want to consider these picks.
Crowdstrike (CRWD)
Crowdstrike (NASDAQ:CRWD) generates annual recurring revenue from its top-tier cybersecurity platform. Many businesses use Crowdstrike to keep their digital assets safe from hackers. A single cyberattack can cost a company millions of dollars between lost business and legal fees. Customers will also lose trust in a company that gets hacked, especially if breaches become common.
The cybersecurity stock has delivered a 50% year-to-date gain and has more than quintupled over the past five years. Annual recurring revenue growth is a big reason for this. The company closed out the first quarter of fiscal 2025 with $3.65 billion in annual recurring revenue, a 33% year-over-year increase. Net income surged to $42.8 million, compared to $0.5 million in the same quarter last year.
Crowdstrike only recently became profitable, but its profit margins are already soaring. Crowdstrike’s net profit margins came close to 5% in the quarter. Shares have received more attention thanks to the company’s recent inclusion in the S&P 500. A strong foundation of annual recurring revenue suggests that the gains can continue.
Semrush (SEMR)
Semrush (NYSE:SEMR) has increased by 45% over the past year as the search engine marketing tool continues to gain momentum. The $2 billion corporation recently reported profits and has wasted no time expanding its margins. Net income and net profit margins more than doubled year over year in the first quarter. Semrush also reported 21% year-over-year revenue growth. The company closed the quarter with $354.2 million in annual recurring revenue.
The company has a top-tier product in the industry and attracts many customers. At the end of the quarter, Semrush had roughly 112,000 paying customers, a 10% year-over-year increase. Semrush’s investments in generative AI have been paying off and should increase retention. The company’s AI initiatives can also attract new paying customers.
Semrush has a large pool of prospects who can become paying customers in the future. The search engine marketing tool has more than 1,125,000 registered free active customers, up 27% year over year. Semrush leadership cited new customers and a higher average revenue per customer as catalysts that drove the strong first quarter results.
ServiceNow (NOW)
A key component of any annual recurring revenue business model is customer retention. If a company attracts customers but has a high churn rate, it won’t maintain growth for long. That’s why ServiceNow’s (NYSE:NOW) 98% renewal rate stands out. The cloud platform helps businesses create workflows, boost productivity, and offer better customer experiences.
ServiceNow is only up by 9% year-to-date but has delivered an impressive 149% gain over the past five years. Wall Street analysts believe those gains can grow from current levels. The stock is rated as a Strong Buy with a projected 14% upside from current levels. The highest price target of $946 per share suggests a potential 26% gain.
The cloud platform exceeded guidance in Q1 2024 with 24% year-over-year revenue growth. Most of ServiceNow’s revenue comes from subscriptions, which offers a solid foundation for future growth. Net income doubled year-over-year, resulting in a 13.3% net profit margin.
On this date of publication, Marc Guberti held long positions in CRWD and NOW. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
