Investor sentiment has deteriorated over the last 18 months. Indeed, the Fed raised interest rates at their fastest pace since the early 1980s in an effort to squash inflation, and Fed officials expect muted economic growth in the coming years. Many fear the aggressive actions taken by the Federal Reserve will tip the economy into a recession.
Those concerns sent the S&P 500 tumbling into a bear market last year, and the broad-based index is still down 15%. But there is a silver lining for patient investors. Every past bear market has ended in a new bull market, and the S&P 500 has never failed to recoup its losses. That makes the current drawdown a buying opportunity.
HubSpot (HUBS -0.78%) saw its share price slip 52% from all-time highs amid the market meltdown. As a result, its current valuation looks quite reasonable. Here's why this growth stock is worth buying.
HubSpot is targeting a large addressable market
HubSpot specializes in customer relationship management (CRM) software. Its platform features productivity applications that help sales, service, marketing, and operations teams engage customers and collaborate more effectively. HubSpot also offers a content management system that enables developers to create personalized web experiences for customers, and its CRM suite features an integrated payments solution that streamlines commerce.
Those tools enable businesses to delight their customers across every step of the customer journey, and happy customers tend to stick around. Marketing software attracts leads, sales software turns leads into paying customers, service software ensures satisfactory customer support, and operations tools unify data and automate workflows across departments. The ability to build lasting customer relationships is critical to virtually every industry, and HubSpot estimates its total addressable market will reach $72 billion by 2027.
HubSpot is one of the best software companies in the world
HubSpot stands out from other CRM companies for three reasons. First, its CRM products were built internally, not stitched together through acquisitions. HubSpot designed its platform as an integrated suite of applications and tools, creating a seamless user experience that highly acquisitive rivals like Salesforce may struggle to provide.
Second, HubSpot is focused on small and medium-sized businesses (SMBs), a market segment that is underserved by larger CRM vendors. Third, HubSpot uses a freemium pricing strategy. Its free tier allows prospective clients to try its software without paying, and its paid product tiers allow clients to add more features as their business needs grow.
Those qualities allowed HubSpot to thrive despite competing with tech giants like Salesforce and Microsoft. In fact, according to research company G2, HubSpot is the leader in CRM software for small businesses. Better yet, G2 recently named HubSpot the best global software company in any product category due to its strong market presence and high user satisfaction scores.
HubSpot has a bright future
HubSpot's growth decelerated as the economic climate worsened, but the company still reported strong results last year. Its customer count increased 24% to 167,386, and the average subscription revenue per customer rose 3%, meaning the company is successfully deepening its relationships with existing users even in a difficult business environment. In turn, revenue climbed 33% to $1.7 billion in 2022, and non-GAAP earnings soared 53% to $2.78 per diluted share.
Turning to the future, investors have good reason to believe that momentum will continue. Since introducing its first product in 2006 (Marketing Hub), HubSpot has blossomed into a full CRM vendor, and its portfolio keeps expanding. For instance, the company just added new payments and commerce capabilities, and it regularly launches new features for its Sales, Marketing, and Service Hubs. Additionally, CEO Yamini Rangan says HubSpot aims to grow upmarket by providing "easier customization, greater extensibility, and better governance capabilities."
Here's the bottom line: HubSpot provides mission-critical software that helps businesses maintain good customer relationships, and its CRM suite is relevant across virtually every industry. Better yet, the company has a strong market presence among small businesses, and its capacity for innovation should keep it in growth mode for years to come. With that in mind, shares currently trade at 11.3 times sales, a nice discount to the three-year average of 17.2 times sales. That creates an attractive buying opportunity for patient investors.
