In its early years, technology platform provider HubSpot (HUBS -0.78%) specialized in helping small businesses execute inbound marketing, with the founders even writing a book about the topic. Since then, the company expanded and now offers a range of customer relationship management (CRM) software.
This expansion helped Hubspot grow its business. After all, the CRM industry was a $64.4 billion market last year.
Hubspot shares hit a 52-week high of $581.40 at the end of July, but recently retreated along with the broader stock market's dip. Is this an opportunity to buy Hubspot shares?
The CRM sector is competitive, as Hubspot faces off against the likes of CRM giant Salesforce. Yet several factors point to Hubspot as a worthwhile long-term investment. Here's a look into those factors.
Hubspot's keys to success
Hubspot sells various software products it calls hubs. These include software for marketing, sales, and management of digital content, such as websites.
Although its product scope expanded over the years, Hubspot remains focused on its target customer segment of small businesses. This is a substantial market, since over 33 million small businesses exist in the U.S. alone, accounting for 99.9% of all U.S. companies.
And as a result, the company's roots in inbound marketing remain a component of its success, since this approach galvanizes customers to seek out businesses through informative content, including newsletters and blog posts, rather than more traditional and expensive marketing methods, such as advertising.
These inbound marketing principles are now easier for small businesses to employ thanks to Hubspot's use of artificial intelligence (AI). The company released a number of AI features this year, including its AI assistant software, which can automatically generate marketing emails and blog posts for Hubspot's clients. Since June, AI assistant adoption has grown by 10 times.
Its continuous evolution helps Hubspot successfully acquire new customers. The company exited the second quarter with nearly 185,000 clients, a year-over-year increase of 23%.
These customers pay a subscription fee to access Hubspot's cloud-based CRM platform in a software-as-a-service (SaaS) structure. This SaaS model provides the company with predictable recurring revenue, and that revenue has grown rapidly in recent years.
Data by YCharts.
Hubspot is also successfully capturing customers through a freemium pricing model. The company allows businesses to try a basic version of its software for free, and customers pay to upgrade to more robust capabilities as their business needs grow. It's a risk-free way for small businesses to try Hubspot, and the model works, as Hubspot's strong customer growth attests.
Hubspot's financial strength
Another sign of Hubspot's success is its strong financials. The company is doing well generating free cash flow (FCF). FCF provides insight into the company's cash available to invest in its business, pay debt obligations, and fund dividends or repurchase shares.
Hubspot generated Q2 FCF of $59.6 million, more than double the prior year's $22.4 million. This follows the first quarter's $85.2 million in FCF, which was also a substantial increase from Q1 2022's $62.6 million, signaling a positive trend of strong FCF generation.
The company also possesses a healthy balance sheet. Its total assets of $2.7 billion, which includes $1.5 billion in cash, cash equivalents, and short-term investments, eclipsed total liabilities of $1.6 billion.
However, Hubspot isn't perfect. The company has posted several years of net losses, and this year looks to add to that trend. In Q2, Hubspot's net loss totaled $118.9 million, more than double the prior year's net loss of $56.4 million. Many high-growth tech stocks are unprofitable, and Hubspot is pouring earnings into capabilities such as AI to sustain its growth, so the lack of profitability isn't a concern at this point.
To buy or not to buy Hubspot
Hubspot's revenue growth is poised to continue. The company estimates third-quarter revenue will reach at least $532 million, a 20% increase over 2022's $444 million. For the full year, Hubspot expects 2023 revenue to hit at least $2.1 billion, up from 2022's $1.7 billion.
Moreover, the CRM industry is forecast to grow from 2022's $64.4 billion to $157.5 billion in 2030. This provides a multiyear tailwind for Hubspot's revenue to continue increasing.
Given its successful products combined with an attractive pricing model, solid financial health, and strong revenue and customer growth in the expanding CRM industry, Hubspot looks like an excellent long-term investment.
