Cramer pinpoints the 'best secular trend' in the market: Subscription services

  • CNBC's Jim Cramer tracks how companies like Netflix and Amazon are seizing on a rapidly expanding segment of the economy.
  • The "Mad Money" host offers investors a few ways to play the rise of subscription services.

Sign up and buckle up: consumers are embracing a new long-term trend that has become so powerful and pervasive that CNBC's Jim Cramer can't ignore it.

"The best secular trend out there right now? ... I think it's the rise of the subscription economy, the legion of companies that make their money by selling some kind of subscription service, often in industries where we never even realized subscriptions could make any sense," the "Mad Money" host said Friday.

After speaking with the founder, Chairman and CEO of Zuora, a newly public software company that sees itself as a "pure play" on the subscription economy, Cramer's perspective on the trend completely changed.

"There's no reason you should have to buy anything," Tien Tzuo, the Zuora chief, told Cramer in a Thursday interview. "We used to have Netflix, we used to have Spotify, but now, we're paying for exercise bikes as a subscription, we're paying for travel as a subscription, ... companies are [even] paying for things like tractor[s] as a subscription."

Tzuo, who wrote a book on the "subscription-based economy," suggested to Cramer that this model isn't going away.

"The point here is that, like it or not, the subscription economy is the future and the companies that understand that are making a fortune," Cramer reflected.

The clear winners

Take the aforementioned Netflix and Spotify, two Cramer-fave companies that were born out of the demand for easier access to movies and music.

"They're subscription services as a gateway drug," the "Mad Money" host said. "By paying a low monthly fee, you get access to a whole world of entertainment."

With 125 million subscribers, a growing library of original content and global reach, Netflix has become a monolith in the subscription economy. Shares of the streaming giant have more than doubled in 2018.

Spotify, the Netflix of music, has 71 million premium subscribers — those who pay up to use its free service without advertisements — and has seen 46 percent premium subscriber growth in the last year.

"Turns out people will pay up" even with the option to use Spotify for free, Cramer noted. "I recommended this one in April at $144, two days after its direct listing; since then, it's given us a 20 percent gain."

Less obvious plays

Apple may not seem like a subscription-service play, but the iPhone maker is carving a space for itself in the subscription economy with its budding razor-razorblade model, Cramer said.

"The phones are the razors and the various subscription services that you pay for automatically are the blades," he said. "This is why I've been so sanguine about Apple even when the bears were ready to give up on it — the service revenue stream is going to be huge. In fact, it really is already huge."

Apple's revenue for its subscription services like Apple Music and iCloud storage grew by 31 percent in the last quarter, blowing past expectations to a $9.2 billion total.

"If Apple's subscription biz were its own company, it would already be large enough to be about a Fortune 80 company," Cramer said.

The "Mad Money" host also touted Amazon Prime as one of the most successful renditions of the subscription economy. The service offers members free shipping, video streaming and music as well as countless deals, including at the Amazon-owned Whole Foods.

"The key here is that Prime creates legions of loyal customers who have a huge incentive to shop at Amazon first and only go to another retailer if they can't find what they need," he said. "That's why Whole Foods instantly became more valuable when it was folded into Amazon one year ago. And it's one more reason, along with the Web Services business that dominates the cloud, why I still think Amazon is worth buying right here."

Cramer also shouted out the "not-so-failing New York Times," an under-the-radar subscription play that Zuora's Tzuo flagged on Thursday.

"For a long time, they tried to give away their content online and make money selling ads," Cramer said. "Needless to say, that did not work. So they put up the paywall and it's been a stunning success."

In 2017, the New York Times' digital subscriptions grew by 42 percent to over 2.6 million — more than double the organization's print subscribers.

"The stock's up about 30 percent since I got behind it last summer. I bet it has more room to run," Cramer said.

Conclusions

"The bottom line? The subscription economy keeps taking over industry after industry after industry after industry because it's so darned lucrative and consumers love it," Cramer said. "These subscription stocks are growth stories that will keep working regardless of tariffs or rate hikes, which is why I like each and every one of them."

WATCH: Cramer subscribes to a secular trend built to last

Disclosure: Cramer's charitable trust owns shares of Apple and Amazon.

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