Monday, November 10, 2014

We Love Recurring Revenue Streams

We caught the end of a clip last week that featured a top performing fund manager who described the three principles behind his investment strategy:

No harmful products (alcohol/tobacco, casino's, soda, fast food)

10X potential

Recurring revenue stream

This strategy is very simple, very straightforward, and very effective if you identify worthy candidates. The recurring revenue stream provides a platform for sustainable growth after a company experiences a 10X event, whether it be a 1000% increase in revenues, earnings, or even market cap.

We checked to see which investments in our portfolio met this criteria. We found two that did, and they just so happen to be two of our largest positions.

Plug Power (PLUG)

Plug Power does not sell harmful products, they sell the exact opposite: environmentally friendly fuel cell modules for forklifts and ground support equipment, and, in the future, fuel cell modules for transportation refrigeration units and electric vehicles (range extenders).

Plug Power has 10X potential. While the company already experienced a 10X event with the performance of its stock price over the past year, the company still can achieve 10X potential in revenues and earnings, though that will take a few years to occur, at least when looking at FY14 revenue of ~$75M. The point is: it has scalability.

Plug Power has multiple recurring revenue streams through its GenKey offering. The company generates recurring revenue from the service of GenDrives and from supplying the hydrogen fuel. Also, one can argue that PLUG will generate recurring revenue in the long term from the actual sale of their GenDrive units, given that they have an approximate lifespan of 5 years (all varies based on usage) and customers will have to replace them. The fact that Plug Power installs the hydrogen infrastructure for fuel storage and dispensing fuel makes it an extremely sticky ecosystem for customers, making it difficult for customers to not replace their GenDrive units once they break down after years of wear and tear.

TransEnterix (TRXC)

TransEnterix does not sell harmful products, they develop (and will sell in future) a surgical robot, named the SurgiBot, that utilizes a single incision the size of a quarter to conduct general abdominal surgeries. The small incision results in rapid recovery for the patient (less blood loss, less scarring), and reduces costs for hospitals (less recovery time in hospital), and the flexible instruments that are inserted through the single incision allow the surgeon to conduct a variety of surgeries with a clear, 3D vision.

TransEnterix has 10X potential, given that their FY14 revenue will be below $1M. The company needs to sell 20 SurgiBots to reach 10X revenue, and that's not including the recurring revenue streams that will be generated from each sale of a SurgiBot. The company's stock price is near its lows, and has the potential for 10X return in the long term.

TransEnterix will have two recurring revenue streams attached to the one time sale of the SurgiBot. The company will receive an annual service fee of ~$50,000 for every SurgiBot it sells, along with a $1,000-$1,500 fee for the instruments used for every surgery that is conducted. So, if a hospital utilizes the SurgiBot for 100 operations in a year, TransEnterix will generate $150,000 in recurring revenue from that single SurgiBot.

We have substantial positions in both TransEnterix and Plug Power and are holding with a very long-term view. If you'd like to learn more about both companies, we have posts under the research reports tab above.