Investment Process – Recurring Revenue Transitions

Recurring Revenue is more than just SaaS; TGEN KLNG

I’m currently performing the last bit of research on a profitable company that’s in the 5th inning of a recurring revenue transformation. We’ll be adding the stock to our MS Microcap Quality Index (MSMqi) this week.

I love investing in companies that are undergoing recurring revenue or SaaS like business model transitions. These are some of the most fertile grounds for multi-baggers I’ve found over my 30 years of investing.

Most people hear “recurring revenue” and immediately think solely about software. That’s fair, SaaS helped make the phrase famous.

For a period of time, at the other stock research platform I founded 17 years ago, Geoinvesting, I was heavily focused on writing about and investing in traditional SaaS. It treated us very well with a few stocks being bought out at hefty premiums, across the technology and medical device industries.

But recurring revenue has quietly expanded far beyond Silicon Valley.

Not just SaaS, Anymore

More and more “boring” companies are figuring out how to smooth out their lumpy revenue streams and building sticky relationships by embedding themselves deeper into their customers’ value chains.

Think about it: a business that once just sold equipment could possibly design it, build it, install it, and, most importantly, maintain it on contract. A manufacturer may add software layers on top of its physical products to create predictable subscription income. Industrial and niche service companies are blending one-time sales with repeatable annuity-like flows. None of this looks like the flashy SaaS story we’re accustomed to, but the math is just as powerful.

Did you know that about half of TGEN revenue is from recurring revenue maintenance contracts related to the sale of its natural gas cogeneration power equipment?

Consider a stock like KLNG that provides a host of subsea services to its customers. Part of its transformation involved getting more involved with its customers during the R&D and design process and also offering maintenance services. Today, it’s much more than just “another” procurement and service provider business.

KLNG and TGEN are both Multi-Baggers in our MSMqi.

Why It Matters More Than Ever

Recurring revenue shifts partly matters more than ever because investors’ average holding period for stocks has collapsed from six years, decades ago, to just six months today.

Wall Street has become obsessed with near-term predictability, so companies that manage to transform lumpy, transactional revenue into steady and profitable recurring revenue can see an outsized payoff in valuation.

First Mover Advantage

The real sweet spot? Catching companies around the 5th inning of a recurring revenue transition. That’s when the recurring model has probably gained enough traction to be de-risked, but not so far along that the crowd is paying attention.

In those innings, recurring revenue might represent just 30–50% of sales, still dwarfed by the legacy one-time or lumpy revenue business model. From the outside, it looks small. From the inside, it’s an inflection point.

Furthermore, many companies will track recurring type revenue separately and disclose it in their financial statements. However, stock screens won’t necessarily pick that segmentation up.

Moving into the later innings is where these sleepy multi-baggers are found. Or, as I like to say, recurring revenue MultiBagger transformation models are born in the early innings, but discovered in the later innings, when the company is about to:

• Show dramatic year-over-year growth in year over year as recurring revenue ramps and starts to make up more of the overall revenue.

• Earn the trust of investors who finally “see it” in the numbers.

• Experience a valuation expansion that reflects both stability and growth.

New Recurring Revenue Idea Coming Soon

These are the setups I’ve tracked for decades, and they’ve produced some of my biggest winners.

In some future post I’ll share a table of those names, multi-baggers built on recurring revenue transitions.

In the meantime, it’s time for me to keep turning over rocks on this new idea we’re looking at that is in fifth or sixth inning of a recurring revenue transformation.

Once I button up a few more items, this is expected to be one of the next stocks we add to our Microcap Quality Index, accompanied by a Cliff Note.

Enjoy your weekend!