Subscription Revenue Makes for a Successful Long-Term Investment

Wall Street loves a company that can create a subscription-based revenue model. Ensuring that customers come back monthly or annually make it possible for companies to better plan their future with some consistency.

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  • While a company with such a model might see lower growth, the consistency of growth tends to be appreciated by investors and analysts alike. Many companies, particularly in the tech space, have been embracing this model.

    One such company is Cisco (CSCO). The builder of the original Internet with switches and routers has rebranded itself with a subscription business model for many of its products and services today. The company reports that it can likely create steady revenue growth of 5 to 7 percent annually through 2025.

    The company’s move has led to it finally moving higher than the overall market, beating the S&P 500 by 10 points in the past year. And as the company has grown steadily, valuation looks solid too, with shares trading at less than 17 times forward earnings.

    Action to take: Investors can see more upside in shares from here, and the company’s outlook makes for a good long-term holding. There’s also been some small dividend growth, on top of the current dividend yield of 2.6 percent.

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  • Traders may enjoy the January $57.50 calls. The at-the-money trade goes for about $2.75, and can deliver mid-to-high double-digit returns in the coming months if the current outperformance in share price continues. Traders may want to build a small stake now and add to it if stocks have a drop in the next few weeks.

     

    Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.