I often find that Australian investors are preoccupied with picking the next resource stock to skyrocket. There's no doubt this strategy can generate big returns in short periods of time. For example, Western Areas Ltd (ASX: WSA) is up 87% since Motley Fool contributor Peter Andersen tipped it about four months ago. I myself usually have a couple of speculative stocks in my portfolio, but if you don't want to run big risks with your capital, it's hard to overstate the security that sticky recurring revenue can bring. It's one of the key criteria I look for because it makes future earnings far more predictable, and it slows or delays the impacts of a downturn. As a result, it is often safer to invest in stocks with sticky revenue.
Telstra Corporation Ltd (ASX: TLS) is perhaps Australia's most famous blue-chip company that boasts sticky recurring revenue. It might not hold the same promise of an imminent boost to profits as construction companies like Lend Lease Group (ASX: LLC) do, but its reliable revenue streams inoculate it against sudden downturns. Telstra's revenue is sticky because the marginal benefits (if any) of changing phone, internet, or mobile provider are often outweighed by the inconvenience of making the change.
Vocus Communications Limited (ASX: VOC) can also boast growing sticky revenue, although it differs from Telstra. Vocus specialises in providing dark fibre, data centre space, internet and VOIP services to businesses located in the various Australian central business districts. As a result, Vocus customers are probably less price sensitive than Telstra customers, but far more sensitive to reliability and performance. It's a good thing Vocus offers some of the fastest and most secure communications in Australia.
XERO NZ FPO (ASX: XRO) is probably the most well-known ASX listed company with growing sticky revenue (although to date is has not reported a profit). Xero offers accounting software as a service. Software is generally even more sticky than telecommunications, because it requires certain skill and know-how on behalf of the user. These skills would have to be re-learned should the customer change providers. Unfortunately, Xero (the stock) is still too expensive for me.
Speaking of software, market minnow Corum Group Limited (ASX: COO) is a great case study of how software can be quite sticky. Corum has (supposedly) over 40% of the market for pharmacy software on its Amfac and Pharmasol products, although Priceline, owned by Australian Pharmaceutical Industries Ltd (ASX: API) uses the main competitor, Fred IT. I've spoken to a pharmacy owner who had been forced to abandon Corum's software when she joined the Priceline network. Though I see the value of sticky revenue – I prefer to invest when it's sticky and growing!
