Recurring revenue: the key to top-rated stocks
2026-06-23 · By Lubin Danilo, founder of Lubin Investment
Companies that score highest in my method almost all share one trait: their revenue comes in regularly, whether markets are calm or turbulent. Software subscriptions, insurance premiums, licenses, tolls — these models produce free cash flow (cash actually generated after all expenses) that is predictable, regular and growing. That is precisely what my method rewards.
- About 90% of top-scoring companies in my method have recurring revenues.
- Free cash flow — cash remaining after all expenses and investments — is the heart of my method.
- Recurrence creates two advantages: cash regularity and high margins, because variable costs do not scale proportionally.
- Nike, Micron, Carnival: without recurrence, cash is erratic and scores drop mechanically.
- SaaS, insurance, software, tolls, contract services: five recurrence families, one shared logic.
What I mean by free cash flow
Before anything else, I want to be precise about a term I use throughout my method: free cash flow. This is the cash that actually stays in a company's accounts after it has paid all its operating costs — salaries, rent, taxes — and all its investments to maintain and grow its business. It is not the accounting profit, which can be manipulated. It is real cash. Out of every $100 in revenue, how much actually stays? That is the first question I ask.
My method evaluates each company on ten criteria. Two of them are directly tied to free cash flow quality: its five-year growth and its margin (what share of revenue converts into cash). And I have noticed something very clear: companies that pass both criteria are, in the vast majority of cases, companies with recurring revenues. This is not a coincidence. It is mechanical.
Why recurrence turns cash into an engine
Imagine two companies each doing $100 million in revenue this year. The first sells software subscriptions: customers auto-renew every month, and delivering the software costs almost nothing extra (no factory, no raw materials). The second sells athletic shoes: each pair requires raw materials, manufacturing, logistics, and the customer might not buy again for two years. Which generates more stable and predictable free cash flow? The first, without question.
Recurrence creates two structural advantages that my method rewards directly. First, regularity: a subscriber who renews in January, July, and December generates predictable cash that the company can build decisions around. My method measures free cash flow growth over five years — a recurring business passes this criterion almost automatically because its cash does not depend on any particular market environment. Second, margins: once you already have a subscriber, the cost to deliver the service the following month is nearly zero. The software, the insurance premium, the toll road access — these do not cost proportionally more to provide to 10 million customers than to 1 million. That is pure scale.
The five recurrence families I find in top-rated stocks
Through my analyses, I have identified five major families of recurring revenue models. Each has its own logic, but all share the fundamental characteristic: the customer comes back without needing to be re-acquired.
The first family is subscription software (SaaS, or Software as a Service). ServiceNow (NOW), Autodesk (ADSK), Shopify (SHOP), Paylocity (PCTY), Intuit (INTU), Qualys (QLYS), Nutanix (NTNX), GoDaddy (GDDY): these companies share the fact that their customers pay monthly or annually to access software. The switching cost is often enormous — years of data, training, integrations — creating what is called a high switching cost. The customer stays because leaving is too expensive.
The second family is insurance. Kinsale Capital (KNSL), Progressive (PGR), Mercury General (MCY), Universal Insurance (UVE), Selective Insurance (SIGI), Assurant (AIZ), Arch Capital (ACGL), W. R. Berkley (WRB), Cincinnati Financial (CINF), RenaissanceRe (RNR): every year, policyholders renew their contracts. The premium is collected at the start of the year, before any claim occurs. It is one of the most inherently recurring business models that exists.
The third family groups together consumables and regularly replaced devices. ResMed (RMD) sells CPAP devices for sleep apnea, but more importantly the masks and consumables that patients replace regularly. Haemonetics (HAE) supplies blood processing equipment to hospitals, along with single-use consumables. Dexcom (DXCM) makes continuous glucose monitoring sensors that must be replaced every ten days. Napco Security (NSSC) combines hardware sales with recurring monitoring subscriptions.
The fourth family is contract-based services. Rollins (ROL) does pest control by subscription: you pay quarterly to keep your home protected. Frontdoor (FTDR) sells annual home warranties. Doximity (DOCS) is the medical platform where physicians hold professional subscriptions. In all these cases, the customer signs up for a term and renews automatically.
The fifth family is monopolistic infrastructure. CME Group, ICE, and S&P Global (SPGI) collect fees on every financial transaction — every time a stock changes hands on their exchanges, they earn a commission. ASML sells lithography machines and then maintains them under service contracts. TSM (TSMC) receives continuous wafer orders from Apple, Nvidia, and AMD. These businesses are not conquering new markets — they own one.
Comparison table: recurrence type and examples
| Recurrence type | Example tickers | Renewal logic |
|---|---|---|
| SaaS / software subscriptions | NOW, ADSK, SHOP, PCTY, INTU, QLYS, NTNX, GDDY | Monthly or annual auto-renewal, high switching cost |
| Insurance premiums | KNSL, PGR, MCY, UVE, SIGI, AIZ, ACGL, WRB, CINF, RNR | Annual premium collected upfront, contractual renewal |
| Regularly replaced consumables | RMD, HAE, DXCM, NSSC | Medical device + consumable replaced periodically by necessity |
| Contract-based services | ROL, FTDR, DOCS | Quarterly or annual subscription for a continuous service |
| Monopolistic infrastructure | CME, ICE, SPGI, TSM, ASML, OMAB, SKYW | Fee on every transaction or order, indispensable position |
What my method penalizes: the absence of recurrence
To understand why recurrence matters so much, look at what happens without it. Micron Technology manufactures DRAM memory chips. Its problem? The memory chip market is cyclical: when supply exceeds demand, prices collapse and Micron's free cash flow turns negative. When demand explodes (as with AI), margins surge. This constant yo-yo is exactly what my method penalizes: the five-year free cash flow growth criterion becomes nearly impossible to pass when one year is brilliant and the next is catastrophic. Result: Micron scores around 6 out of 10 in my method.
Nike is another instructive example. The brand is powerful, the name is known worldwide, but the business model relies on selling shoes and apparel. Every season, Nike must re-win its customers. Competition from On Running and Hoka is eroding its position. Revenue fluctuates with fashion and sport trends. Free cash flow follows these swings. My method gives Nike around 2 out of 10 — not because it is a bad company, but because its model is not structurally recurring.
Carnival Corporation illustrates the same problem amplified. Not only are revenues non-recurring (a cruise is a one-off purchase), but the sector is extremely sensitive to external shocks — pandemic, economic crisis, fuel prices. Free cash flow can swing from deeply positive to deeply negative in a single year. Homebuilders share the same profile: they sell when interest rates are low and the housing market is favorable, and their sales collapse otherwise.
Recurrence is not a guarantee: what else I check
I want to be honest about something: having recurring revenues is not enough on its own to earn a top score. A company can have subscriptions and still lose money if it spends too much to acquire customers or carries too much debt. What my method looks for is the combination of recurrence AND profitability.
Concretely, here is what I verify beyond recurrence. Free cash flow margin must be high — ideally above 15% of revenue. Free cash flow growth must be positive and consistent for at least five years. Debt must not crush the cash generated. And the company must deploy its cash intelligently: buying back shares, investing in growth, rather than paying for ruinous acquisitions.
Roper Technologies (ROP) is an excellent example of what I look for: a conglomerate of niche software companies, all subscription-based, with free cash flow margins around 25% and steady growth for over a decade. OMAB, the Mexican airport operator, has recurrence tied to passenger traffic — every plane that lands generates an airport fee. SKYW (SkyWest) operates under long-term contracts with major airlines: its revenues are fixed in advance for several years.
Why I built my method around this criterion
Let me explain what led me to weight recurrence so heavily in my method. When I look at companies that best navigated the crises — the 2020 pandemic, the 2022 rate hikes, the 2008 recession — they are almost always companies whose revenues kept coming in. ServiceNow did not see its subscriptions cancelled in 2020. Progressive kept collecting its premiums. ROL kept doing its pest control rounds. Meanwhile Nike was losing sales, Carnival was docking ships, and Micron was navigating a catastrophic price collapse.
The investing I practice is not speculation on the next quarter. It is identifying companies capable of generating cash predictably over ten or twenty years. And revenue recurrence is the best predictor I know of that capability. That is why in my method, a company without recurrence has very little chance of reaching top scores — and why companies that do reach them have, in around 90% of cases, a recurring model at the heart of their business.
FAQ
What exactly is recurring revenue?
It is revenue that comes in regularly, often automatically, without the company needing to re-acquire the customer each time. A monthly subscription, an annual insurance premium, an airport fee on every landing: the customer is already committed, and cash arrives predictably.
Why is free cash flow more reliable than profit?
Accounting profit can be adjusted through bookkeeping entries — depreciation, provisions, asset write-downs. Free cash flow measures the real cash coming in and going out. It is much harder to manipulate and better reflects the true health of a business.
Can a company without recurrence still perform well in the stock market?
Absolutely. But it generally does so less predictably, with sharper ups and downs. My method is not looking for market timing opportunities — it seeks companies whose cash progression is regular and defensible over the long term. Without recurrence, that is much harder to guarantee.
Why does Micron not pass the filter despite its strong years?
Because my method evaluates consistency over five years, not peak performance. Micron has brilliant years when DRAM prices rise, but also very difficult years when supply exceeds demand. This irregularity is precisely what my free cash flow growth and margin criteria detect and penalize.
Are tolls and airports really recurring?
Yes, insofar as traffic is structurally stable and the operator holds a geographic monopoly. OMAB operates airports in dynamic Mexican tourist regions: every plane that lands generates a fee, regardless of who manages it. The recurrence here comes from infrastructure monopoly, not from a traditional subscription contract.
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About the author
Written by Lubin Danilo, founder of Lubin Investment. A self-taught individual investor, I have analyzed stocks through their fundamentals for several years and invest my own money with this method. I codified it into a tool that judges a company's quality and its price separately, using criteria drawn from the financial literature (Warren Buffett, Michael Mauboussin, Aswath Damodaran).