HubSpot (NYSE: HUBS) started its journey in 2006 as an expert in online marketing services. Since then, it has branched out to sales, customer relationship management (CRM), operations, and now, integrated payment solutions.
The move shows HubSpot’s dedication to enhancing the optionality and interoperability of its services for customers, acting as the engine for businesses and creating service bundling synergies for HubSpot and its customers. This “sticky” business model means that once you’re a HubSpot customer, you’ll stay a HubSpot customer. So, is it a solid investment?
The bull case for HubSpot
These moves will likely pay off long-term, boosting HubSpot’s customer retention rate while continuing to grow — and HubSpot is definitely growing. Total customers have grown over 40% year-over-year (YoY) from 86,000 in Q2 2020 to 121,000 in Q2 2021. HubSpot is also on track to surpass $1 billion in total revenue in a fiscal year for the first time, based on trailing 12-month figures. Boasting a 58% CAGR in international revenue growth since its IPO in 2014, these growth rates, combined with key partnerships with payment leader Stripe, really does beg the question; could HubSpot become a mega-cap SaaS company like Salesforce (NYSE: CRM) one day as well? Possibly, but there are some risks in the short term.
The Bear Case for HubSpot
A key risk right now is valuation. SaaS for businesses is a highly competitive industry, and the stock appears to be overheating, up over 100% year-to-date (YTD). Not to say this is completely unjustified, but you don’t want to overpay for growth when investor sentiment is at an all-time high. With the recent boost, HubSpot is trading at a P/S multiple above 29 and is yet to reach profitability despite strong growth. We can also see that HubSpot is onboarding plenty of new customers but a key segment will be “Enterprise” customers — international businesses with thousands of employees. If the Enterprise segment started to lag, we could see a significant slowdown in growth prospects which may impact the share price.
It may be a long-term winner, but there may be a better entry point on HUBS before then.
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Content Writer at MyWallSt
David's favorite stock is Google. He's a daily user of its YouTube platform, where you can learn or find something brand new at the touch of a button. He believes the company will continue to grow for many years to come.