Artificial intelligence (AI) software revenue is expected to increase at 42% annually to reach $14 trillion by 2030, according to analysts at Ark Invest. Other experts measure the impact with different numbers, but every estimate makes one thing abundantly clear: Analysts believe demand for AI software will skyrocket in the coming years.
Many businesses will benefit from that trend, but some will benefit in more nuanced ways. For instance, HubSpot (HUBS 2.55%) may not be known for its AI expertise, but the company is incorporating more AI tools into its customer relationship management (CRM) platform, and those innovations could certainly drive demand for its software.
Here's why this growth stock is worth buying.
HubSpot is a leader in AI sales assistant software
HubSpot provides CRM software to small and medium-sized businesses (SMBs). Its platform includes productivity tools for sales, service, marketing, and operations teams, as well as solutions for payments and content management. Those tools help businesses engage potential clients, convert potential clients into paying customers, and maintain lasting relationships with those customers.
HubSpot holds substantial mindshare in the CRM market despite competition from larger companies like Salesforce and Microsoft. In fact, HubSpot is the most popular CRM provider among small businesses, and it leads the market for AI sales assistant software, according to research company G2. Management attributes that success to the company's intuitive platform, continuous product development, and freemium pricing strategy, as well as its broad partner ecosystem.
Despite economic headwinds, HubSpot reported strong first-quarter financial results. Its customer count increased by 23% year over year, and the average subscription revenue per customer increased by 3%. In other words, HubSpot is landing new clients and expanding its relationships with existing clients. In turn, revenue rose 27% year over year to $502 million in the first quarter, and non-GAAP net income soared 122% to $1.20 per diluted share.
Looking ahead, HubSpot is well positioned to maintain that momentum. Research company G2 recognized HubSpot as the best global software seller in any category in 2023. That prestigious commendation is based on its strong market presence and high user satisfaction scores, both of which portend strong growth in future quarters.
HubSpot recently launched new AI tools
In March, HubSpot added two new AI software products to its CRM platform, both of which are powered by OpenAI (the company behind ChatGPT). The first is Content Assistant, an AI tool that helps sales and marketing teams creates headlines and write content for blogs, websites, and emails. The second is ChatSpot.ai, an intelligent chatbot that automates tasks in response to natural language commands. For instance, clients can simply ask the chatbot to add contacts to their CRM database, or generate sales and marketing reports, and it will complete those tasks.
Content Assistant and ChatSpot.ai build on HubSpot's previous investments in AI, which include solutions for lead prioritization (i.e., AI sales assistant software) and content optimization. Neither tool fundamentally changes the business, but they do make its CRM platform incrementally more compelling. They also showcase a capacity for innovation that should keep HubSpot in growth mode for years to come.
HubSpot trades at a reasonable valuation
CRM software helps businesses provide a delightful customer experience across every stage of the customer journey, and happy customers tend to spend more money. In other words, CRM software is mission-critical for many businesses, and it will only become more important as businesses attempt to differentiate themselves in an increasingly crowded digital economy. To that end, HubSpot believes its market opportunity will increase at 10% annually to reach $72 billion by 2027.
Currently, shares trade at 12.2 times sales, a discount to the three-year average of 17.3 times sales. That valuation look reasonable in context. HubSpot has a strong market presence in a large and growing industry, and the median 12-month price target among Wall Street analysts is $500 per share. Investors should capitalize on that opportunity by purchasing a small position in this growth stock today.
