1 Top Cloud Stock to Consider Buying Right Now

Software-as-a-service (SaaS) stocks are all the rage with investors these days, and with good reason. Not only do these companies provide essential tools and services to clients across a host of industries, but they tend to be particularly resilient in a range of economic conditions while generating considerable balance-sheet growth and share-price appreciation. In this segment of Backstage Pass, recorded on Dec. 14, Fool.com contributors Asit Sharma, Rachel Warren, and Demitri Kalogeropoulos discuss.

Asit Sharma: I'm going to quickly go through mine, which is HubSpot (HUBS -0.01%) today, symbol HUBS. I think this is one of those overlooked ideas that are central to virtual opportunities. HubSpot offers inbound marketing software. This is way to market that brings customers to you, rather than an advertising model where I hang out a banner or try to pull people in by waving my arms around.

Inbound marketing is when you utilize content to have a more organic landing of the customer to your pages where you can then try to convert them. HubSpot was a pioneer in the concept of inbound marketing.

In fact, the two founders are well-known for conducting research on this when they were both grad students, and they have really blazed this trail for this type of business. What I like about HubSpot though is that it keeps adding hubs. Each part of its platform is referred to as a hub, but really what they are, they're just vertical businesses, new software offerings to the land and expand model. Their latest hub is an operations hub.

They're getting into the game competing with companies which offer business automation and business improvement software. You can think of a service now as a company that might intersect with HubSpot's offerings. You can think of Intuit, which acquired Credit Karma and Mailchimp, as a company that could be competing with HubSpot. But HubSpot has a first-mover advantage in this world of inbound marketing. What I like about them is, while they have a steep valuation, they are an indispensable company.

They've proven their land and expand model, which aim not just the big enterprise customers, but with lots of small and medium-sized businesses and even mom-and-pops. Functionally, they're very sticky and I see them playing a long-term role in this economy as more and more companies decide to use methods of marketing which have a greater yield and a more meaningful yield. Getting the people who actually want your service in.

I like that despite having been around for a long time, they're still growing at a really fast rate. In this last quarter, their total revenue was $339 million bucks and that was up 49% over this time last year.

Even though that quarter itself was very strong, they had a bounce during the pandemic as companies which were going to remote mode needed to buy HubSpot services. This is growth upon growth. Company isn't profitable yet. It has rented a slight loss margin of about 4%, but it is cash flow-positive.

They use a lot of stock-based compensation, and they have bigger non-cash components through their income statements. If you look at, let's say the first nine months of this year, they booked revenues of $931 million bucks, and they generated operating cash flows of $144 million.

Basically, although they've got these, what we call book losses, they aren't burning through cash. They have a fairly solid balance sheet as well. As a founder-led business, I always like to see visionary founders who stick around. Now, the CEO of HubSpot actually recently took a back seat, but he promoted a very capable executive in his stead. This is Brian Halligan and that executive herself is quite an expert in this field. Yamini Rangan is her name.

I think that when you look at this landscape of companies that play in digital transformation, you have the crowded parts of the market where companies I love are fighting against each other like Asana and Atlassian, maybe a company like Smartsheet. They're all providing the same types of collaboration tools and workplace productivity tools.

HubSpot doesn't directly compete in those spaces. It's more spread out among its content marketing hubs. It's got a customer relationship management hub. I mentioned the operations hub. A pretty well-diversified business that isn't fighting tooth and nail for this one type of collaboration software market share. Keeping my eye on it. It has taken a hit after having a tremendous run over the last several years. But I just had it pulled up, bear with me, everyone.

This stock after boy it's, looks like it's down about 30% from its all-time highs, it's still up more than 70% year-to-date. I think this is a pattern that [laughs] we're seeing, guys. When we look at stocks that we really like and they've taken a beating but they're still up positive for the year. I'll stop here on HubSpot because we've got about 10 minutes left, and I do want to get to these last two things. Any quick comments from either of you? Then we will wrap up rapid fire with the rest.

Demitri Kalogeropoulos: I would just quickly say I haven't been following the stock but I did follow HubSpot services for a while. As you might know, I had a blog going for a while many years ago [laughs] and their email marketing, I remember reading about that. Here's a little trivia point for you. I think it was from their blog that they do a lot of work on trying to get click-through rates on people to open up your content, your emails.

Do you know what the number one most clickable headline that they've ever tested? I don't know if this is still true is, you are not alone. [laughs] I always think of the Michael Jackson song when I hear that, but that's the one that just clicks off the charts for some reason. But again, this is several years ago. I don't know if that's still true but that's the one that resonated.

Rachel Warren: It's a very cool piece of trivia, though. [laughs]

Asit Sharma: It is, and useful too. If you ever want a cold email an executive somewhere or anyone whose- 

Rachel Warren: Just put that in the subject line.

Asit Sharma: -attention that you want to get, you are not alone.

Demitri Kalogeropoulos: There you go.

Rachel Warren: Wow.

Asit Sharma: Watch out, CEO of McDonald's, check your inbox tomorrow.