4 Reasons Why Enterprise Software Firms Can Be Great Investments

The answer is easy - because they can't.

Look, its easy for most consumers to cancel their subscription services. Would life really be a lot different if you canceled your Netflix (NFLX) subscription? A lot of folks have decided they don't need to pay for cable TV anymore, "cutting the cord" with providers like Comcast (CMCSA). Switching from a subscription service like Spotify (SPOT) to something like Apple Music isn't all that disruptive to our lives.

But even then, it is extremely unlikely that any substantial percentage of subscribers decide to do this all at once. Aside from a major issue like a data breach or privacy incident, losing a large chunk of subscribers all at once just doesn't happen - even in a low switching cost environment. Even cord cutting - a very real consumer phenomenon - has only recently crossed the 3% subscriber loss barrier for cable providers, after many years of hype. That's a manageable loss.

In enterprise software, though, it's not so easy to just switch. Businesses manage their critical day-to-day functions on top of many of these systems: marketing departments with Salesforce (CRM), HR departments with Workday (WDAY), and software development teams around tools from Atlassian (TEAM). They have an incredible amount of time, training, and data into these systems. Switching would be incredibly disruptive.

Given this, enterprise software enjoy recurring revenues with very modest churn rates. For the most part - as long as they don't screw up - they can rely on the bulk of their customers to pay month after month, year after year. And in many cases, they can also rely on those same customers to buy more adjacent products to fit into their existing work flows.

Conclusion

With an enormous and growing end market, highly attractive recurring revenue model, and generally high switching costs for its customers, enterprise software is without question one of the most attractive industries to hunt for investments. A true "green dot" segment.

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Disclosure: Steve owns no stocks referenced here.

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