HubSpot Stock: Rapid Rebound Opportunity (NYSE: HUBS)

The key stock profile investors should be looking for right now: top performing stocks that have been significantly discounted in recent months and are waiting for a rebound. In the tech small-mid cap growth space, HubSpot (NYSE: HUBS) stands out as a name that has continued to deliver outstanding fundamental performance alongside a decline in its share price.

HubSpot, for investors unfamiliar with the name, is a CRM platform that focuses on “inbound marketing” — or selling to customers who have already engaged with a brand. Over the years, HubSpot has added a number of modules, most recently Operations Hub, which helps companies organize and manage customer data while automating internal workflows. Each of HubSpot’s products is priced at different levels for entry-level and pro users, which has helped the company capture a very large user base:

HubSpot’s fundamentals and its stock price have existed in different universes over the past two quarters. Even though HubSpot shattered Wall Street expectations and maintained its furious >40% y/y revenue growth space, despite its already massive momentum, its stock price lost almost half its value from the highs. . To date alone, HubSpot shares are down about 25%:

In early November, before the tech crisis began, I wrote a note on HubSpot as the stock was trading in the $800s, arguing that a correction was imminent. At the time, the stock was trading at more than a >20x forward earnings multiple, which I thought was unwarranted and very risky. Now, however, with HubSpot’s much more modest valuation multiples and the fact that its fundamentals have shown no signs of slowing down, I update my view on HubSpot to bullish, and I think it’s a great buy time for this title.

Here’s an updated look at what I consider to be the main bullish drivers for HubSpot:

• Large-scale growth. As a rule, when a company reaches a revenue rate above $1 billion, it encounters saturation problems and its growth rates rarely exceed 20-30% per year. This is not the case with HubSpot. Thanks to strong sales execution and successful cross-selling of the various modules in its portfolio, HubSpot managed to maintain an incredible >40% YoY growth.
• Inbound marketing will continue to grow in importance. Companies are increasingly relying on soft marketing and social media experts to attract customers rather than direct sales (many salespeople have been laid off during the pandemic and many are not returning). HubSpot’s shares in the global CRM space will continue to expand.
• Almost pure recurring revenue base. 97% of HubSpot’s FY21 revenue came from subscription revenue. The fact that so much of HubSpot’s revenue is already locked in gives the company great revenue visibility.
• Exorbitant subscription gross margins. HubSpot has subscription gross margins of around 84% on a pro forma basis, which creates plenty of opportunities for operational leverage.
• Member of the “Rule of 40”. HubSpot delivers >40% year-over-year revenue growth on top of ~10% pro forma operating margins, which is a truly rare profile in the tech industry. These days, growth of over 40% by itself is hard to come by – and it’s rarely accompanied by profitability.

From a valuation perspective: At the current share price of close to $459, HubSpot is currently trading at a market cap of $21.08 billion. After offsetting $1.37 billion in cash and $402.7 million in debt on HubSpot’s most recent balance sheet, the company’s bottom line the enterprise value is $20.11 billion.

Meanwhile, for the coming fiscal year, HubSpot is forecasting revenue of $1.72-1.73 billion, or 32-33% year-over-year growth:

Within this revenue range, HubSpot trades at 11.6x EV/FY22 turnover. Granted, we can’t call a double-digit revenue multiple “cheap” in today’s market, where most software stocks have fallen to single-digit multiples – but I would say the current revenue growth of HubSpot > 40% y/y at scale Plus, its 10% pro forma operating margins are more than deserving of a sizable premium. I could easily see HubSpot expanding to ~16x FY22 revenue before it was deemed “expensive,” indicating a price target of around $610.

In short: while HubSpot certainly needed a correction from November levels, macro volatility resulted in a sharp correction that was deeply disproportionate to HubSpot’s true fundamentals. Buy the dip here.

Q4 Download

Now let’s discuss HubSpot’s latest Q4 results in more detail. The fourth quarter revenue summary is shown below:

HubSpot’s revenue grew 46% YoY in the quarter to $369.3M, beating Wall Street expectations of $357.5M (+42% YoY) with a margin of four points. Revenue growth also largely kept pace with last quarter’s 49% year-on-year growth.

New products are an important driver of year-over-year growth. Operations Hub, which HubSpot just launched last April, is proving very popular with customers and surpassed the 15,000 subscriber mark at the end of the fourth quarter. Businesses have found this tool useful for cleaning up customer data, generating reports, and getting more value from the HubSpot CRM system.

The company also recently launched HubSpot Payments, a payment processing solution aimed primarily at small customers with less than 100 employees. Now available to all HubSpot US customers, the payments product helps customers combine commerce and CRM into one platform, and HubSpot is reporting strong early traction with the product.

Overall, 60% of HubSpot customers are now “multi-hub” (or multi-product) customers, up from just 34% in 2017, which shows just how much of HubSpot’s product flywheel is. become powerful.

Here are some anecdotal comments from CEO Yamini Rangan’s prepared remarks on the fourth quarter earnings call that highlight the selling strategy that has worked well for the company over the past year:

Now let’s shift into high gear to talk about the alignment between product and go-to-market and how that drove great execution in 2021. Historically, our sweet spot has been the 20-200 employee segment. Last year, we set out to optimize the customer experience across the 3 key segments in which we operate. At the lower end, we provide a full suite that’s easy to use and easy to buy, and we provide a better experience through contactless and chat-assisted sales. We drive customer adoption of our product, and we see it in the momentum of our suite.

At the high end of the market, we continued to invest significantly in internal enablement initiatives that drive sales productivity. We’re also working to strengthen alignment between inside sales and our solution partners, and we’re seeing momentum there. The rigorous processes we have in place allow our sales team to better communicate the value of HubSpot and win high-end, higher value and ASP deals that have contributed to the strong results we’ve seen throughout the year. year.

Looking back on our accomplishments in 2021, we’ve made remarkable progress in becoming the CRM platform of choice for growing businesses. Small and medium businesses need great front-office solutions that can deliver insights to drive growth. This increase, coupled with our product innovation and go-to-market execution, gives us a strong foundation for strong growth in 2022.”

Margins also remained strong. As shown in the chart below, HubSpot’s fourth quarter pro forma operating margin was 10.3%, an improvement of 50 basis points from the fourth quarter of the prior year. For FY21 as a whole, HubSpot’s margin of 9.0% also represented a 50 basis point improvement over FY20. Recall that HubSpot’s long-term goal is to achieve an operating margin of 20-25% – but as long as the company is growing >30% per year, it wouldn’t expect to increase revenue. pro forma operating margins only 1 to 2 points. per year.

Additionally, HubSpot generated $203.3M in free cash flow in FY21, which represents a 16% FCF margin and multiplies by ~2.5x YoY. other.

Key points to remember

There’s a lot to like about HubSpot at its new lower share price. Rapid growth, abundant margins and growing TAM/continuous cross-selling momentum are now available at a much more modest valuation. Buy the dip here and wait for a short-term bounce.