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Bull Of The Day: HubSpot (HUBS)

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HubSpot hit the spot for investors in its earnings report last week with a big beat on sales and EPS estimates, sending share surging 13.5%. This positive earnings story has analysts revising their models upward and propelling HUBS into a Zacks Rank #1 (Strong Buy).

The Business

HubSpot provides companies with software as a service (SaaS). It delivers cloud-based business services with segments including Marketing Hub, Sales Hub, Service Hub, and a free CRM system. This is a company with a growing international presence, generating 32% of sales coming from operations abroad.

HubSpot’s started with its Marketing Hub and has built its system out from their since its IPO in 2014 with free CRM and a preliminary Sales Hub. In 2017 the firm added its Service Hub for customer service support. HubSpot’s goal is create a seamless customer experience that allows businesses to “grow better”. Their target customers are small to medium sized businesses that have large growth potential. 

HubSpot has nearly 65,000 customers spread across more than 100 countries, representing 35% growth year-over-year. Multiplatform customers grew 80% since Q2 last year and multiplatform users now make up over 38% of HubSpot’s total customer base. This is a great sign for a young SaaS company, illustrating customer confidence in HubSpot and its platforms ability to improve business operations.

According to HubSpot’s CEO, Brian Halligan, “customers on average integrate more than five different third-party applications with HubSpot.” The ability to integrate platforms could make or break a firm’s decision of whether to use HubSpot’s platforms. This firm is investing more in its developer experience to smooth out any developer speedbumps.

The firm focusses on small to medium size companies as their niche market, though their tiered system allows them to broaden that product offering. The segmented tiered system expands HubSpot’s total addressable market (TAM). The monthly breakdown of each products’ pricing is below.

HubSpot is expanding its freemium offering to entice more firms to try out their product. This might cause some customers to initially downgrade but the long-run benefits of the broadened exposure will far outweigh this short-term drop. Having a strong freemium platform is a crucial pipeline for a subscription based service like this.

Top competitors in the SaaS space include Salesforce (CRM - Free Report) , Microsoft Azure (MSFT - Free Report) , and Google Cloud (GOOGL - Free Report) .

Financials and Performance

Since HubSpot went public 5 years ago it has been able to illustrate consistent year-over-year and quarter-over-quarter topline growth with a compounded annually growth rate (CAGR) of 42%. HUBS international sales growth outpaces domestic at 62% CAGR.

This firm has been able to achieve economies of scale over the last five years, continuously expanding margins. HubSpot posted an 8.3% operating margin this past quarter with a long term target of 20% - 25% (2% - 3% improvement per year). Below you can see HubSpot’s gross and operating margins over the last 5 years.

HubSpot has rallied hard thus far in 2019 returning shareholders 51%, far outperforming the broader market and the software industry.

HubSpot’s consistent topline growth quarter-over-quarter allows investors to be comfortable with an excessively high multiple. This is not of concern when evaluating an equity with so much growth potential. Analyst are estimating 30% topline growth and a 57% EPS expansion just this year.

Take Away

HubSpot is operating in the competitive SaaS space, but I believe that its niche positioning in the market gives them a competitive edge. Start-ups and growing businesses still need the same cloud-based business infrastructure. I expect this company to continue to proliferate growth domestic as well as internationally as businesses becomes more competitive and the demand for SaaS escalates.


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