What happened
Shares of HubSpot (HUBS 0.28%) were down 3% today as of market close. It caps off a terrible week for it and other fast-growing companies getting dropped by investors after the Federal Reserve indicated an interest rate hike is on the way. HubSpot finished the week down nearly 23%.
So what
What do the Fed's interest rate decisions have to do with HubSpot? The company does have some debt on its balance sheet ($400 million), but it's in the form of notes that can be converted to stock and bears a low fixed interest rate. In fact, the company has $288 million in cash and another $882 million in short-term investments on hand, so a higher interest rate could actually even benefit businesses like this that keep extra liquidity invested in interest-bearing investment vehicles.
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However, a higher interest rate environment does reduce the value of future cash flows, which in turn decreases the present value of a stock. And given the high premium HubSpot trades for (a respective 20 and 162 times trailing-12-month sales and free cash flow, even after the sharp sell-off), shares were due for a breather eventually. Turns out it's the Fed that was destined to be the catalyst for this most recent downturn.
Now what
Nevertheless, short-term stock price movements, as wild and painful as they may be at times, are not the best way to assess a company's future prospects. Though HubSpot has sold off sharply as of late, it's still a fast-growing software company operating in the cloud-based software industry. And plenty of customers are still flocking to its platform. Current-year expectations imply a 46% year-over-year increase in revenue.
Add in the fact that HubSpot operates at a healthy free cash flow profit margin and has ample cash on hand to support its expansion initiatives, this is still an impressive software business. If you originally invested in HubSpot for the long-term potential, there's no reason to have doubts now because of a Federal Reserve-induced crash.
