HubSpot's (HUBS -0.78%) shares have soared 75% this year as the company impressed investors with its robust growth in a tough macro environment. But even after that spectacular run, its stock remains 40% below its all-time high from November 2021.
Will HubSpot's stock climb back to those record levels, or is it too late to hop aboard the bullish bandwagon? Let's review its business model, growth rates, and valuation to decide.
Image source: Getty Images.
What does HubSpot do?
HubSpot's platform bundles together customer relationship management (CRM), marketing, lead generation, search engine optimization, and analytics tools. Most of its tools are designed for lower-cost "inbound" marketing campaigns -- such as social media campaigns, viral videos, blogs, and emails -- that drive consumers to seek out brands on their own. HubSpot's CRM platform is free to use, and it's smaller and simpler than premium CRM platforms like Salesforce (CRM 0.42%).
HubSpot's toolkit targets smaller businesses that don't have the resources to launch big advertising campaigns or use paid CRM services. Its marketing, sales, and service hubs operate on a freemium model that unlocks extra features for paid subscribers. It generates additional revenue from its app marketplace, which enables its users to buy and integrate third-party apps into its hubs; and consulting services, which help its customers maximize the value of their marketing campaigns.
HubSpot believes its long-term growth will be driven by smaller customers as they scale up their businesses. It also plans to boost its retention rates with new AI services, which can be used to generate digital content, summarize calls and emails, assist customers with chatbots, and accelerate the analysis of its accumulated data.
How fast is HubSpot growing?
HubSpot's revenue rose 33% in 2022, and it expects 22%-23% growth in 2023. Just like many other cloud-based software companies, its growth cooled off after macro headwinds drove its clients to rein in their spending.
HubSpot's growth in total customers has remained fairly consistent over the past year, but its growth in average subscription revenue per customer slowed to a crawl as its net revenue retention rate dropped below its target level of 110%.
|
Metric |
Q2 2022 |
Q3 2022 |
Q4 2022 |
Q1 2023 |
Q2 2023 |
|---|---|---|---|---|---|
|
Total customer growth (YOY) |
25% |
24% |
24% |
23% |
23% |
|
Average subscription revenue per customer growth (YOY) |
10% |
7% |
3% |
3% |
2% |
|
Net revenue retention rate |
110%-plus |
109% |
107% |
104% |
103% |
|
Total revenue growth (YOY) |
36% |
31% |
27% |
27% |
25% |
Data source: HubSpot. YOY = year over year.
Last August, CFO Kate Bueker claimed HubSpot would maintain a net revenue retention rate of "around 110%" in the third and fourth quarters of 2022. Unfortunately, tighter spending on HubSpot's services -- along with slower expansion across its seats, contact tiers, and portals -- reduced that key metric to just 103% in its latest quarter.
During HubSpot's latest conference call, Bueker said the pressure on its net revenue retention would "persist" in the "near term," but that it should remain "above 100%."
Focusing on its margins and profits
HubSpot's near-term revenue growth is decelerating, but it laid off 7% of its workforce earlier this year and executed other cost-cutting measures to stabilize its margins. It's nowhere close to breaking even on a generally accepted accounting principles (GAAP) basis, but its non-GAAP operating margins have consistently expanded over the past year.
|
Metric |
Q2 2022 |
Q3 2022 |
Q4 2022 |
Q1 2023 |
Q2 2023 |
|---|---|---|---|---|---|
|
GAAP operating margin |
(12.4%) |
(7.3%) |
(2.9%) |
(8.9%) |
(22.4%) |
|
Non-GAAP operating margin |
7% |
9.2% |
13.6% |
13.5% |
14% |
Data source: HubSpot. YOY = year over year.
HubSpot expects its non-GAAP operating margin to rise from 9.8% in 2022 to 13.9% (at the midpoint) in 2023. It expects its non-GAAP EPS to soar 88%-90% for the full year, compared to 53% growth in 2022.
HubSpot's growth is impressive, but it isn't cheap at 79 times forward earnings and 12 times this year's sales. The CRM leader, Salesforce, is growing at a slower rate, but it trades at just 27 times forward earnings and 6 times this year's sales.
Is it too late to buy HubSpot?
HubSpot's resilient sales growth and expanding operating margins support the bullish case for bigger gains, but its declining revenue retention rates, high valuation, and lack of GAAP profits could all limit its upside potential in this challenging market. Therefore, I'll keep a close eye on HubSpot -- but I think it's a bit too late to chase its yearlong rally.
