Software companies are taking over consumer staples as safety stocks
What you invest in to protect yourself from market crashes could be changing. According to research by Polen Capital, software companies are overtaking consumer staples as the new safety stocks.
- Safety businesses — companies less affected by economic conditions (i.e. stock prices that fluctuate less during market crashes).
- Consumer staples — the term for products like food & beverage, hygiene and tobacco products — a.k.a. safety businesses.
What makes software safe? Many software companies make the majority of their sales through “recurring revenue” — i.e. customers pay a monthly/yearly subscription.
- The recurring nature of these transactions makes their sales and earnings more predictable.
- Example: An e-commerce store isn’t likely to stop paying for its website subscription from Shopify (NYSE:SHOP) during a recession.
Show me the evidence: Polen Capital analyzed the standard deviation, a factor that analyzes how risky an asset is, of both consumer staples and software stocks. The data shows the risk level of both sectors converging in the past 20 years.
Why the change? Software companies didn’t always charge on a subscription basis. Over time:
- Companies like Microsoft and Adobe shifted their pricing model from a one-time fee to a subscription model (Microsoft office used to cost several hundred dollars).
- Dominant consumer staple brands like Procter & Gamble (NYSE:PG) are challenging new e-commerce brands.