Unless this is your first time using the internet, you've probably come across your fair share of online ads. Occasionally, these ads are relevant or even helpful, but usually they're just annoying. In other words, marketing strategies meant to engage consumers end up irritating them, wasting time and money on both sides of the interaction.
In 2005, CEO Brian Halligan and CTO Dharmesh Shah co-founded HubSpot (HUBS +1.24%) to solve this problem. Here's why this growth stock could help you retire rich.
Image source: Getty Images.
HubSpot's opportunity
HubSpot pioneered the concept of inbound marketing. With this strategy, brands create websites, blogs, and social media content designed to attract the target audience. As a result, inbound marketing material typically feels more organic, more helpful, and less intrusive compared to traditional outbound ads. More importantly, inbound ads generate higher quality leads, driving greater conversion rates.
However, HubSpot didn't stop with marketing software. Its customer relationship management (CRM) platform also includes tools for sales and service agents, as well as content management, all of which help businesses build lasting relationships with their clients. HubSpot also employs a freemium pricing strategy, allowing potential clients to trial its products before they make a purchase. So far, this business model has been quite effective.
As of Q2 2021, HubSpot had roughly 121,000 customers, up 40% from the same period in the prior year. Even so, that figure represents just 4% of the 3 million small- and medium-size businesses across the U.S., Canada, and Europe. In fact, Bank of America analyst Brad Sills values HubSpot's current market opportunity at $87 billion, but that number should only get bigger as the company adds new tools to its platform.
Image source: Getty Images.
HubSpot's advantage
To fuel its growth, HubSpot works with a growing network of "solutions partners." These are businesses that provide consulting services to their own clients, often helping them implement new strategies and technologies, such as HubSpot's CRM software.
At the same time, HubSpot allows third-party developers to build new tools for its platform. In fact, as of Dec. 31, 2020, HubSpot's App Marketplace listed over 600 integrations, including support for Shopify's commerce software, Zoom's communications platform, and Facebook's Messenger. These integrations serve to make HubSpot a more robust CRM solution.
More importantly, this business model creates a network effect. As HubSpot adds new clients, its platform becomes a more valuable resource to solutions partners and third-party developers, both of which help bring more clients to HubSpot. This virtuous cycle has been a powerful growth driver.
Over the last three years, HubSpot has posted impressive sales results as the number of clients using multiple products and integrations has increased. At the same time, HubSpot's non-generally accepted accounting principles (GAAP) operating margin has trended upward, compounding the growth in free cash flow.
|
Metric |
Q2 2018 (TTM) |
Q2 2021 (TTM) |
CAGR |
|---|---|---|---|
|
Revenue |
$441.4 million |
$1.1 billion |
34% |
|
Free cash flow |
$32.0 million |
$144.5 million |
65% |
Source: Ycharts. TTM: trailing-12-months. CAGR: compound annual growth rates.
Looking ahead, I think HubSpot can maintain this momentum. Earlier this year, the company released Operations Hub, a new suite of products that allow clients to sync application data with the HubSpot platform and automate business processes. For instance, you could integrate payment data from a billing app, then automatically generate and schedule a renewal contract in the future. In short, Operations Hub helps clients operate more efficiently, while expanding HubSpot's market opportunity.
More broadly, HubSpot is still led by its visionary co-founders. In 2006, Halligan and Shah quite literally wrote the book on inbound marketing when the pair published Inbound Marketing: Get Found Using Google, Social Media, and Blogs. As the CEO, Halligan boasts a 98% approval rating on Glassdoor, and 93% of those surveyed would recommend HubSpot to a friend. Both metrics are evidence of a great corporate culture.
Here's the bottom line: HubSpot is a founder-led business with a growing market opportunity and a strong competitive position. That's why this growth stock could help you retire rich.
