What happened

HubSpot (HUBS -1.46%) stock climbed 11% in February after the company smashed analyst forecasts with its February 16 quarterly earnings report. It notched higher-than-expected revenue, but investors were more impressed with HubSpot's profits and 2023 outlook.

Investors are worried about slowing growth and shrinking margins right now, so companies that buck these trends can generate a lot of positive momentum. While most stocks slid lower as February ended, HubSpot's positive outlook kept it from losing its gains.

So what

HubSpot's quarterly revenue grew 27% to $470 million, while its adjusted earnings rose nearly 70%. That resulted in $71 million in free cash flow, slightly less than in the prior year. Obviously, it would be great to see cash flow expanding, but it's still impressive that the company is achieving that level of sales without burning cash.

HubSpot is driving diversified growth through both increased customer count and expanded relationships with existing customers. That's a very bullish sign for customer satisfaction and competitive position.

Business sales team in an office, wearing headphones for calling customers and using their computers to record activity.

Image source: Getty Images.

The company also released a forecast that calls for 18% growth next year, leading to nearly 50% growth in operating income. While that represents a clear slowdown, Wall Street is excited about HubSpot's expanding profit margins, and its growth is sufficiently high to make investors happy right now. The company's ability to generate cash flow is comforting to a risk-averse crowd that has grown less tolerant of unprofitable growth businesses.

Now what

HubSpot's strong performance this year has pushed the stock into a fairly expensive valuation range. Its forward PE ratio is nearly 100, though this number seems less aggressive when we consider the 50% adjusted-EPS growth rate. HubSpot's 11.3 forward PE and 72 price-to-cash-flow ratios are similarly high.

Those valuation ratios won't necessarily prevent HubSpot from delivering great long-term returns, especially if the company continues to add new customers and enhance its product suite. However, the share price is high enough to fuel volatility.

Growth stocks' valuations reflect their companies' enormous potential, but they're often the stocks that get hit hardest when market conditions deteriorate. Don't be surprised if HubSpot experiences price fluctuations driven by economic news rather than company-specific news.