This week, Microsoft reclaimed its place as the world’s largest publicly traded company… 16 years after it lost that title.
During the dot-com boom from 1998 to 2000, Microsoft was the world’s largest company. It reached that peak again in 2002, but struggled thereafter, as other companies surpassed it in market cap.
Microsoft initially became the world’s most valuable company by selling licenses for its Windows and Office software.
But there was a problem with that business model… Once someone bought a license, they owned the software forever. And most buyers didn’t need to upgrade again for five to 10 years—making revenues lumpy.
Microsoft executives realized they couldn’t grow the business by selling a product to people once or twice every decade. So they changed the model.
And that change helped the company climb to the top once again…
On Monday, Microsoft overtook Apple as the most valuable U.S. company. As of this writing, Microsoft’s market cap stands at $828 billion—$2 billion more than the previous No. 1, Apple. Amazon is now third at $773.3 billion.
Here at the Daily, we’re always looking for opportunities we can profit from. And Microsoft’s changing business model is one you should be familiar with.
Today, I’ll tell you what that model is… and name three companies that could follow in Microsoft’s footsteps.
The Lost Decade
As you can see in the chart below, Microsoft went nowhere from 2001–2013. It was a lost decade…
But in 2014, the company started to break out of its funk.
What changed? Microsoft hired Satya Nadella as CEO.
In his first press conference as CEO, Nadella didn’t mention Windows once. That was odd since Windows was Microsoft’s main product. But he was signaling a change…
Nadella said that Microsoft would focus on the “cloud,” a term that covers services such as data storage and software applications accessed through the internet. Basically, Nadella wanted to move Microsoft applications online.
That meant users of non-Windows platforms like Apple’s iOS and Linux could access Microsoft’s products… for a price.
Regular Windows users also saw a change… Instead of paying a one-time price of $199 to buy Office software in a store or download it, they now had to pay a $99 annual subscription fee.
This subscription model gave Microsoft consistent and “recurring” revenue. And as you can see in the chart above, investors loved it. Microsoft soared 200% after switching to the subscription model.
It no longer had to guess how many people would buy Office products. Now, a steady stream of users would pay a base fee of $99 per year to use its applications. And that amount grows steadily year after year, meaning no more lumpy revenue.
In 2013, Microsoft had nearly no subscription revenue. But today, 70% of its revenue comes from subscriptions.
Following Microsoft’s Path
Microsoft isn’t the only company to adopt a subscription model, either.
Around the same time, software firm Adobe shifted from licensing its suite of applications to selling subscriptions instead. Its stock soared 300% after that.
Even Amazon struggled before it adopted a subscription model. Its price fell 75% from 2000 to 2006.
But in 2006, the company launched its two main subscription services: Amazon Prime and Amazon Web Services. Soon after, Amazon started its epic run higher.
Now, you’re not reading this to learn about companies that already ran up after adopting subscription models. You’re looking for the next big winners.
Here are three on our radar:
Electronic Arts (EA): The video game maker started a light subscription service in 2016. For $30 per year, you can play older versions of its games. But this July, the company unveiled a $100 annual subscription plan. It allows gamers to play the newest versions of its games. And in the recent market downturn, EA fell 45%, giving investors a chance to get into the company at a cheaper price.
FireEye (FEYE): The cybersecurity company started a subscription model a couple years ago. It’s slowly converting its customers into that plan. And it’s starting to pay off… Even as the market turned down, FireEye reached three-year highs.
Cisco Systems (CSCO): The network equipment manufacturer is switching its focus from hardware routers to a software subscription model. If customers pick up on this plan, even a large company like Cisco could make a big move higher.
But remember, not all subscription models work out.
For instance, food delivery service Blue Apron has been an epic failure so far. So has Helios and Matheson Analytics, the parent company of MoviePass. Last year, its shares traded over $8,000. Today, they’re worth about two pennies.
So don’t buy a business solely because it has a subscription model.
Always do your research, make sure any investment fits into your overall wealth-building plan, and never bet more than you can afford to lose.
Analyst, The Palm Beach Daily
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