Putnam: Pursuing The Power Of Recurring Revenue
Authors:
Richard E. Bodzy
Gregory D. McCullough, CFA
Portfolio Managers, Putnam US Large Cap Growth
In certain segments of the growth universe, we see trends that are powerful and multiyear in nature. These trends play a part in our research to identify growth themes and the businesses that may benefit from them.
We prioritize above-market and above-category revenue and free-cash-flow growth. We’re not necessarily seeking the fastest-growing companies over short periods of time. Instead, we choose to prioritize revenue visibility—the ability of company managements to forecast future revenues. This is the concept behind “subscriptions and consumables,” our newest growth theme.
A considerable number of companies offer better revenue visibility than their peers, due to the recurring nature of their go-to-market strategies. Many have a significant portion of their business tied to subscription services. Subscriptions bring ongoing payments from customers and are a key strategy for generating recurring revenue. In the consumer space, examples include streaming TV, video, and music services. In technology, examples include subscriptions for productivity software and customer relationship management systems. Consumables, another generator of recurring revenue, are products or services that must constantly be repurchased. Other examples include businesses that offer prescriptions, test kits, and other disposable supplies.
As with many of our themes, the benefits of subscriptions and consumables are evident across a number of sectors. Subscription demand, which rose during the COVID-19 pandemic, has not subsided. The total addressable market is growing as subscription products and services expand to new industries. According to an April 2024 study by Juniper Research, subscription economy revenue may reach $996 billion by 2028, up from $593 billion in 2024—a rise of 68%.1
Within health care, we see potential in companies that sell mission-critical, often single-use consumables with recurring demand. This allows the companies to generate revenue from each patient visit. For example, a maker of robotic-assisted surgical systems and instruments benefits from double-digit annual procedure growth as robotic surgery expands into larger surgical categories and additional use cases. For other businesses, we see unique growth potential driven by non-discretionary veterinary and hospital surgical visits. One business in the health care life sciences space has over 75% of its revenues tied to selling consumables across business lines to its existing large and growing customer base.
Another key benefit of subscriptions and consumables is they can provide a measure of stability for businesses during periods of economic disruption. According to Zuora, in the decade from 2012 to 2022, subscription-based companies in the Subscription Economy Index (SEI)2 have grown 3.7 times faster than the companies in the S&P 500.3
The themes we focus on do not change often because they are based on secular trends and our multiyear outlooks. However, we are constantly considering new themes as markets and consumer preferences change. We don’t try to identify which day, month, or quarter a stock may outperform. We look for durable growth companies that tend to perform competitively within their industries across a full economic cycle.
Endnotes
1 There is no assurance that any estimate, forecast or projection will be realized.
2 The Subscription Economy Index™ (SEI) measures the growth in the volume of business for subscription-based products and services.
3 Source: The Subscription Economy Index report, Zuora, March 2023.
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SOURCE: https://www.putnam.com/putnam-investments/articles/2024/pursuing-the-power-of-recurring-revenue