HubSpot Stock: Quick Rebound Opportunity (NYSE:HUBS)

The key profile of stock that investors should be chasing after right now: high performers that have been dramatically pummeled over the past few months and are overdue for a rebound. In the small/mid-cap tech growth space, HubSpot (NYSE:HUBS) stands out as one name that has continued to deliver exceptional fundamental performance alongside a decay in its share price.

HubSpot, for investors who are unfamiliar with the name, is a CRM platform that focuses on “inbound marketing” – or selling to customers that 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 tiers for entry-level and professional users, which has allowed the company to 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 has smashed Wall Street’s expectations and maintained its furious >40% y/y revenue growth space, despite its already-sizable scale, its stock price has shed nearly half of its value from peaks. Year to date alone, shares of HubSpot are down ~25%:

In early November, before the tech crunch began, I wrote a note on HubSpot when the stock was trading in the low $800s, arguing that a correction was incoming. At the time, the stock was trading at greater than a >20x forward revenue multiple, which I thought to be unjustified and highly risky. Now, however, at HubSpot’s much more modest valuation multiples and due to the fact that its fundamentals have shown no signs of slowing down, I’m upgrading my view on HubSpot to bullish, and believe this is a great buy-the-dip moment for this stock.

Here’s a refreshed look at what I view to be the key bullish drivers for HubSpot:

• Growth at scale. Typically, when a company hits over a >$1 billion revenue run rate, it will have run into saturation issues and its growth rates rarely exceed 20-30% y/y. This is not the case with HubSpot. Through strong sales execution plus success in cross-selling the various modules in its portfolio, HubSpot has managed to retain incredible >40% y/y growth.
• Inbound marketing will continue to grow in prominence. Companies are increasingly relying on soft marketing and social media experts to bring in customers versus direct sales (many salespeople got laid off during the pandemic and many aren’t returning). HubSpot’s shares of the overall CRM space will continue expanding.
• Nearly pure recurring revenue base. 97% of HubSpot’s FY21 revenue was subscription revenue. The fact that such a large degree of HubSpot’s revenue is already locked in gives the company plenty of revenue visibility.
• Sky-high subscription gross margins. HubSpot boasts ~84% subscription gross margins on a pro forma basis, which creates plenty of opportunities for operating leverage.
• “Rule of 40” member. HubSpot is generating >40% y/y revenue growth on top of ~10% pro forma operating margins, which is a truly rare profile in the tech sector. These days, 40%+ growth itself is hard to come by – and rarely is it accompanied by profitability.

From a valuation standpoint: At current share prices near $459, HubSpot currently trades at a market cap of $21.08 billion. After we net off the $1.37 billion of cash and $402.7 million of debt on HubSpot’s most recent balance sheet, the company’s resulting enterprise value is $20.11 billion.

Meanwhile, for the upcoming fiscal year, HubSpot is guiding to $1.72-$1.73 billion in revenue, representing 32-33% y/y growth:

Against this revenue range, HubSpot trades at 11.6x EV/FY22 revenue. Certainly, we can’t call any double-digit revenue multiple “cheap” in today’s market, where most software stocks have sunk to a single-digit multiple – but I would argue that HubSpot’s current >40% y/y revenue growth at scale plus its 10% pro forma operating margins are more than deserving of a sizable premium. I could easily see HubSpot stretching up to ~16x FY22 revenue before it’s deemed “expensive”, indicating a price target of ~$610.

In short: While HubSpot certainly needed a correction from November levels, macro volatility has driven a steep correction that has been deeply disproportional with HubSpot’s true fundamentals. Buy the dip here.

Q4 download

Let’s now discuss HubSpot’s latest Q4 results in greater detail. The Q4 earnings summary is shown below:

HubSpot’s revenue grew 46% y/y in the quarter to $369.3 million, beating Wall Street’s expectations of $357.5 million (+42% y/y) by a four-point margin. Revenue growth also largely kept pace with last quarter’s 49% y/y growth rate.

New products are a big driver of the year-over-year growth. Operations Hub, which HubSpot just launched this April, is proving to be very popular with customers, and it has surpassed the 15,000 subscribers mark as of the end of Q4. Companies have found this tool useful in cleaning customer data, generating reports, and deriving greater value from the HubSpot CRM system.

The company also recently launched HubSpot Payments, which is a payments processing solution intended primarily for smaller customers with fewer than 100 employees. Now available for all of HubSpot’s U.S. customers, the payments product helps customers combine commerce and CRM into a single platform, and HubSpot reports strong early traction with the product.

As a whole, now 60% of HubSpot’s customers are “multi-hub” (or multi-product) customers versus just 34% in 2017 – showing how powerful HubSpot’s product flywheel has become.

Here’s some anecdotal commentary from CEO Yamini Rangan’s prepared remarks on the Q4 earnings call that highlight the sales strategy that worked well for the company over the past year:

Now let’s shift gears to talk about the alignment between product and go-to-market and how that drove great execution in 2021. Our sweet spot historically has been the 20- to 200-employee segment. Last year, we set out to optimize the customer experience across all 3 key segments in which we operate. At the lower end, we’re providing a full suite that is easy to use and easy to buy, and we are driving better experience through touchless and chat-assisted sales. We’re making it seamless for customers to adopt our product, and we see that within our suite momentum.

At the higher end of the market, we’ve continued to invest significantly in internal enablement initiatives that are driving higher sales productivity. We’re also working to strengthen the alignment between inside sales and our solutions partners, and we’re seeing momentum there. The process rigor that we have is enabling our sales team to better communicate the value of HubSpot and win higher-value, higher-ASP, upmarket deals that contributed to the strong results we saw across the year.

As I look back on our accomplishments in 2021, we made remarkable progress on our path to becoming the CRM platform of choice for scaling companies. Small and medium businesses need great front-office solutions that can provide insights to drive growth. That increase, coupled with our product innovation and go-to-market execution, gives us a solid foundation for strong growth in 2022.”

Margins continued to be strong as well. As can be seen in the chart below, HubSpot’s pro forma operating margin in Q4 was 10.3%, a 50bps improvement over the prior-year Q4. For the entirety of FY21, HubSpot’s 9.0% margin also represented a 50bps improvement over FY20. Recall that HubSpot’s long-term target is to hit a 20-25% operating margin – but as long as the company is growing more than >30% y/y, it would only expect to expand pro forma operating margins by 1-2 points per year.

Additionally, HubSpot generated $203.3 million of free cash flow in FY21, representing a 16% FCF margin and multiplying by roughly ~2.5x year-over-year.

Key takeaways

There’s a lot to like about HubSpot at its new lower share price. Rapid growth, rich margins, and an expanding TAM/continued cross-sell momentum are now available in a much more modest valuation. Buy the dip here and wait on a short-term rebound.