This is not investment advice. Do your research before taking a position in any of the securities mentioned in the post below.
For anyone who is analytical in nature, it can be very tempting to spend hours tinkering with DCF instead of dedicating time to understanding a company's model. Although I do not necessarily think time spent on a DCF is useless, it is no surprise that there are more ways to understand where something is a good investment
Razor/Blade model
There are a few various businesses that have this business model
Printer cartridges:
HP is the biggest manufacturer of printers in the world. Of course, the printer is not where they make $$; it is the replacement cartridges.
In 2014, HP Enterprise (IT services/software) and HP Inc (PCs/Printers) split. This split is somewhat similar to the Dell/VMWare split
Berkshire recently invested in $HPQ which at the time appeared to be a bizarre choice for a company; because generally everything is being digitised and office attendance is fewer
HP is the dominant printer/cartridge company and whilst office attendance (and in turn printing) is dropping; the economics on cartridge refills is amazing so even though earnings growth is mixed; the economics are impressive:
5yr average ROCE for HPQ is >20%
Although topline growth will likely be flat; it will still produce a c.3% dividend yield
Op margins for printing a 16-18% and supplies are almost 2/3rd of total sales
Specialised equipment servicing:
$ISRG is a medical company with a particular focus on surgical robots (amongst other things). Sure, beyond $ISRG, there are plenty of players in the medical space with recurring revenues (e.g. ProMedicus, ResMed, Medtronics are somewhat similar) but I thought this was a good example of how a recurring business models works
$ISRG has the 'da VInci' surgical robots with >6,500 systems installed and although the purchase price for these robots is quite expensive (e.g. $1-2m) they make most of their money from
Servicing the machines
Replacing componentry
Data monitoring information
Unlike the aforementioned $HPQ; this company is in a much more aggressive expansion phase and its market position and/or valuation is much harder to predict; nonetheless it is an interesting "modern-day Gilette"
Domain subscription models:
Verisign/$VRSN has over 170 million domain names (e.g. ".com" and ".net" type businesses) and it is a 'regulated monopoly' of a sort. Put another way - VRSN makes money when either new .com domains are issued or old .com domains are renewed.
To explain at a high-level how this mechanism works:
The Internet Corporation for Assigned Names and Numbers (ICANN) allows Verisign to keep track of a domain's registrar
Verisign have the responsibility/liability of ensuring the registrar of domains works (e.g. when you type Amazon.com = you are sent to their website)
Verisign then lease the domain names out to the GoDaddy's of the world
GoDaddy then subleases these onto us as a consumer
This is not per se a 'razor/blades' business but more of a tollroad business; where regulatory/physical barriers prohibit a competitor. Whilst its maintenance costs/capex - it has
Because $VRSN could extort an online business for pricing its product, there was a recent law that the maximum increase for a domain is 7% p.a. over a finite amount of years
In conclusion, of course, there are plenty of other businesses with recurring models. Beyond SaaS or eComm marketplaces, some examples include:
American Tower = Owner of wireless towers
Moodys = Dunn & Bradstreet services
DexCom = Diabetes/glycose monitoring tech
MarketAxess/ICE = Stock Exchanges
Unsurprisingly these businesses are rarely cheap and they are not per se a good investment but it is worth understanding the power of a recurring income and these models.
Comments