4 Reasons Why Enterprise Software Firms Can Be Great Investments

All around, it is a far better model of selling software. For the customer, it eliminates numerous expenses and headaches, allowing the company to focus on their core business. For the vendor, it provides a predictable, recurring stream of revenue as opposed to the old "big bang" revenue model, where adding new licenses was key and cash flows could be unpredictable.

There is little question that cloud computing is entering the explosive part of the growth curve. Latest forecasts from firms like Gartner estimate cloud computing to grow at over 18% annual rates through 2020, reaching over $160 billion dollars.

That looks like a pretty attractive place to be for investors. And, even should the cloud market achieve these lofty targets, that's still only about 1/3rd of the overall enterprise software market. The growth potential in this space is pretty enticing.

Highly Recurrent Revenue Model

There are few things more attractive in business than a regularly recurring revenue model.

Recurring revenue means predictable cash flow. If this doesn't sound exciting, it should. Predictable cash flow allows management to carefully chart its growth plans, planning spending and capital needs with high accuracy. When a business goes insolvent, it is generally because of cash flows unexpectedly disappearing, making a firm unable to meet its debt requirements. This is far less likely in a recurring revenue model.

Think about this... would you rather have regular income, or get paid double salary one year and half of your normal salary the next (and not knowing it would happen)? It's a no-brainer, right? Obviously being able to rely on regular income is what we want - it just makes life a lot easier to manage.

High Switching Costs For Customers

At last, we come to maybe the biggest advantage in the enterprise software space. We just talked about recurring revenues, but how do we know that half of customers won't just up and cancel their subscription one year?

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Disclosure: Steve owns no stocks referenced here.

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