TDNet Discover

The recurring revenue model has been quickly adopted by non-technology industries such as industrials, consumer goods, healthcare industries and business services but the implication of valuation in these non-technology industries is empirically insufficiently explored. This is a quantitative archival research study that determines whether publicly traded non-technology firms in the U.S. that use recurring revenue models, statistically significantly gain in firm valuation multiples, when compared to non-adopting matched firms. This study takes the form of an analysis on the enterprise value-to-revenue (EV/Revenue), enterprise value-to-EBITDA (EV/EBITDA) and price-to-earnings (P/E) multiples using a difference-in-differences panel design, which is used to examine 2,000 firm-years and 200 firms operating between the years 2015 and 2024. The theoretical framework combines Fundamental Valuation Theory, Fama-French risk factor model and information asymmetry and market learning literature. Findings have shown that recurring revenue adoption is statistically significant in terms of multiple expansion in all three measures of valuation, and statistical heterogeneity at the industry level is observed in the four sectors. An event-study analysis shows that valuation recovery is gradual and multi-period in nature and in line with investor learning. Results are mapped into the Subscription Value Engineering (SVE) Framework, which is a 4-module practitioner tool that assists capital allocation decision-making, acquisition-pricing, and investor communications by non-technology executives, financial analysts, and strategic advisors.