Buying a stock after reaching an all-time high is a conundrum. Oftentimes, a stock will reach a new high due to a catalyst, and that catalyst usually isn't going away just because a new record is achieved. It can be daunting to buy at the top as there is always the risk of your investment going in the red shortly thereafter. In other cases, however, it can be just the beginning of potentially life-changing gains. Take Tesla (TSLA 3.23%), for example. In January 2020 it was hovering around $90 split-adjusted, which at the time was a new all-time high. Investors who ignored it then missed out on more than 700% of returns. Disconnecting stock price from a company's business is difficult, but it can produce amazing returns if done properly.
Buying HubSpot after each time it has achieved a new high has turned out to be a solid investment -- so far. After recovering from its pandemic lows, HubSpot has achieved a higher stock price nearly every month since May 2020 -- up 550% since the pandemic bottom. The reason for all this growth? Accelerating revenue, customer growth, and new product launches.
While it began as a medium-sized (20-200 employees) marketing platform; it has expanded to offer a full product suite including sales, service, content management system (CMS), and operations. During their latest quarterly conference call, management announced enterprise and professional levels of their CMS product, catering to larger businesses. With revenue and customers growing at 53% and 40%, respectively, HubSpot is executing well. Even with this revenue growth, a key reason for HubSpot's rise is multiple expansion. HubSpot's price-to-sales ratio has increased dramatically with time .
This metric measures how much a shareholder is willing to pay for each revenue dollar HubSpot brings in. As the P/S ratio surges, expectations tend to follow suit.
In this case, the increase was due to HubSpot's success throughout the pandemic, when its main clientele, small and medium-sized businesses, struggled. Yet, those businesses didn't sever their relationship with HubSpot's product. Strong execution during tough times gives investors confidence that HubSpot will continue to shine no matter the environment.
The workforce supply constraint is driving employment costs up, as FedEx (FDX 0.92%) recently noted, and businesses are hiring in every industry. Paycom's software streamlines this process and also helps fill openings by finding talent. By efficiently managing the onboarding and payroll process, a company can cut down on HR department costs, freeing up capital to go after workers who directly contribute to revenue, rather than overhead expenses.
The stock has risen nearly 30% in two months following strong second-quarter earnings. While Paycom is richly valued at a 177 P/E ratio, investors shouldn't get too hung up on this multiple as Paycom is in growth mode and isn't focussing on optimizing profits just yet. When it does, expect this ratio to fall rapidly. It's also worth noting are that it is, in fact, profitable and sports a GAAP net income margin of 21%. Additionally, management is projecting Paycom's first fiscal year with revenue totaling more than $1 billion. This would indicate growth of 23%, justifying management's decision to expand its customer base and focus less on generating profits for the time being.
Similar to HubSpot, Paycom has demonstrated buying at new highs has worked out for patient investors. Since its public debut in 2014, Paycom has risen over 3000%. Because the business is strong and executing well, investors should be willing to purchase Paycom regardless of achieving a new record high.
One of the original SaaS companies, Salesforce has been selling its customer relationship management (CRM) software since 1999. Since then, it has expanded its product suite by acquiring analytics company Tableau and communications tool Slack, adding to the suite of products they created themselves. Salesforce's massive platform empowers companies to drive sales and interact with current and potential customers, sparking growth for its clients. HubSpot and Salesforce are direct competitors, but Salesforce typically edges out HubSpot when larger businesses select a CRM platform.
With a market cap of $280 billion, Salesforce is considerably larger than HubSpot or Paycom, which have market caps of $34 billion and $31 billion, respectively. For perspective, Salesforce did $21 billion in sales which is more than half the size of both companies. This gap could narrow even further as Salesforce raised its fiscal year revenue guidance to $26 billion. Additionally, they initiated fiscal year 2023 (Feb. 1, 2022 through Jan. 31, 2023) guidance of $31 billion
These numbers gave investors confidence and sent the stock up to a new all-time high. As Salesforce has also opted for growth instead of profits, its valuation should be assessed from a sales standpoint. While trading at just under a 10 P/S ratio, this number will drop to around 8.5 if their project growth is achieved and the stock price stays the same.
All three companies are achieving all-time highs for good reasons. If HubSpot, Paycom, and Salesforce's execution continues, there will be more record stock prices ahead.
HubSpot could face more volatility due to its high revenue; but if customer count and revenue grow, the stock will follow suit.
Paycom is growing slower than Hubspot, so investors may not see as large of a return. Yet, it will be a more smooth ride because Paycom is already turning a profit -- eliminating doubts about profit-generating capabilities.
Finally, Salesforce's future is hard to predict. Typically, companies its size are generating a profit due to a lack of growth opportunities. Clearly, Salesforce is still finding new revenue streams and expanding, as their revenue guidance indicated. Salesforce would be a tremendous buy for investors looking to add a growth company into their portfolio, but don't want to buy a stock with an inflated valuation.